Bitcoin

Frozen? Bitcoin’s price correlation with other assets is not yet defined

Fidelity’s report states that Bitcoin is an uncorrelated asset generates discussion, as not everyone agrees with the assessment.

A recent report by institutional cryptomoney company Fidelity Digital Assets concluded that Bitcoin (BTC) shows very little price correlation with the main financial assets, according to data from the last five years. Over the course of 2020, Bitcoin has gained greater adoption in conventional finance, which could logically affect the asset correlation or lack thereof. Has the Bitcoin correlation changed in 2020?

Ria Bhutoria, research director at Fidelity Digital Assets, told Cointelegraph by email: „Bitcoin has experienced higher positive correlations with other assets over shorter periods of time, especially during periods of uncertainty and turbulence, and even before 2020.

Amid growing concerns about COVID-19 and the prevention measures from March 2020, Bitcoin’s price plummeted, apparently in line with the US stock market. „The increased correlation between Bitcoin and other assets was a consequence of a short-term liquidity crisis that affected many asset classes,“ Bhutoria said of the March drop. Essentially, a lot of people rushed to sell their financial assets for cash when times became uncertain around the news of the COVID-19 pandemic. She added:

She added: „As a result, the correlation of all these assets with each other increased. With respect to Bitcoin, another possible reason could be a greater overlap in market infrastructure and among market participants in the traditional and digital asset markets“.

Fidelity published a detailed report in October entitled „Bitcoin’s Investment Thesis: Bitcoin’s Role as an Alternative Investment“. Written by Bhutoria, the report addressed a number of issues. One particular segment of the report noted the lack of correlation of Bitcoin with other financial assets, including US stocks and gold. Correlation is a much-debated issue in the crypt-currency industry.

Using data from January 2015 to September 2020, Fidelity’s report concluded that Bitcoin performed differently from core assets, indicating virtually no correlation with other markets for that time period. BTC scored 0.11 in a range between -1 and 1. A rating of 1 means that asset prices travel exactly in step with each other, while a rating of -1 means exactly the opposite price action. Any asset with a score of 0 travels its own price path, unaffected when others move.

In addition to the March drop, many other instances have shown an apparent correlation between Bitcoin and traditional markets, at least at certain points. The element of adoption could influence the equation, making Crowd Millionaire more correlated than years before, an aspect pointed out in the Fidelity report. „Bitcoin is a young asset that, until recently, was not linked to traditional markets,“ the report says, adding: „Because it is embedded in institutional portfolios, it may increasingly correlate with other assets.

Bitcoin has seen significant widespread adoption by 2020. One sign is that a number of traditional financial players, such as MicroStrategy, have built up significant Bitcoin positions. PayPal also recently announced plans to add Bitcoin to its platform in 2020, driving the asset even further into the spotlight.

„Bitcoin’s long-term correlations with other assets may remain low, given Bitcoin’s different risk and return factors against other asset classes and its dynamic and narrative use cases,“ Bhutoria said, adding:

„If investors with longer time horizons and convictions are assigned to Bitcoin, the magnitude of the spikes in short-term correlations with other assets in times of uncertainty could also decrease. These are assumptions that we will continue to update as we get more data and a better understanding of Bitcoin’s behaviour in a prolonged crisis“.

Over the years, other industry players have also influenced Bitcoin’s pricing in line with other markets. Morgan Creek Digital co-founder Anthony Pompliano has long defended Bitcoin as an uncorrelated asset.

„All assets tend to correlate to 1 in a liquidity crisis,“ Pompliano told Cointelegraph in an email, which also coincides with Bhutoria’s explanation. He added:

„We saw a liquidity crisis earlier this year, so it is natural to expect correlations to increase during these times. We are seeing a decoupling in the last few weeks and I expect we will see a return to low or no correlation in the coming months“.

Prior to the launch of Bitcoin in 2009, the 2007-2008 financial crisis generated similar liquidity problems. As the public often compares Bitcoin to gold, looking at gold during this crisis adds perspective. „We saw that gold fell by 30 percent from the liquidity crisis during the summer of 2008, along with all assets with a trend to a correlation of 1 during the same time,“ Pompliano wrote, adding:

He added: „Finally, the assets were later decoupled and history can teach a great lesson here too“.

Erik Finman, a Bitcoin millionaire who invested in BTC at the age of 12 in 2011, has a more tentative approach to Bitcoin’s lack of correlation that may have changed recently. „We have to wait and see,“ he told Cointelegraph, noting:

„I tend to lean towards the fact that Bitcoin is not tied to anything else in the long term, as its value is determined by its own technology and its relationship to the world. Any correlation will be short term and will be forced by investors“.

According to the three responses described above, Bitcoin apparently maintains at least some correlation with other assets during isolated short-term events. However, on a wider time scale and scale, BTC continues to prove to be an uncorrelated asset, at least so far.