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Bitcoin’s Correlation with Gold and Stocks Declines – What Does It Mean?

February 17, 2021 at 15:08 by Mark Stevenson

The premier cryptocurrency, Bitcoin (BTC) continues to push historic highs as it has soared above $51,000 on February 17. Yesterday, the cryptocurrency broke through an important psychological barrier of $50,000. At the same time, its correlation with such traditional assets as stocks and gold continues to decline, according to analysts at Bloomberg.

Such divergence is a good reason for investors to think about diversifying their portfolios and including cryptocurrencies in them.

Lower correlation means more diversification

According to Bloomberg analysis, the 90-day correlation between the BTC rate and the S&P 500 stock index dipped from 0.5 to 0.21 in October.

It is clear that assets with a high degree of correlation show similar financial performance in the end. Meanwhile, the required level of diversification is achieved only when using weakly correlated assets.

The analytical company Morning Star wrote about this, emphasizing the importance of diversified investment portfolios, which should combine stocks, bonds, and other investment vehicles.

Experts at Morning Star said:

Due to a diversified approach to investment, such an allocation of funds, as a rule, provides more stable results.

Investors are evaluating the benefits of Bitcoin

Bloomberg experts spoke with Benson Durham, head of research at Cornerstone Macro LLC. He noted:

For Bitcoin, as well as other digital coins, versus other traditional high-risk asset classes, the benefits of diversification remain the same.

Last year, Durham and his colleague Roberto Perli proposed adding cryptocurrencies to all investment portfolios that include stocks to reduce their volatility. Interestingly, in the past, institutional investors were deterred by the excessive volatility of Bitcoin. Now analysts are looking into how it can improve the risk-adjusted returns on portfolio investments.

At the same time, Durham adds that he also considers it effective to buy competing cryptocurrencies with BTC, such as Ethereum (ETH). He explains this by a decrease in the average correlation between the cryptocurrencies themselves. Accordingly, the diversification of digital assets also, in his opinion, makes sense.

However, Durham does not succumb to the euphoria about Bitcoin and warns that if the cryptocurrency market starts to collapse, then “there may be nowhere to hide”.

This volatile correlation

The question of Bitcoin’s correlation with traditional financial assets is still open, as is its ability to hedge risks. Experts have been trying for a long time to establish correspondences between the dynamics of the MTC exchange rate and the S&P 500 index, but have not yet been able to deduce stable patterns.

Recently, analysts at the American bank JPMorgan said that bitcoin is unlikely to be included in an investment portfolio to hedge risks. Meanwhile, Willy Woo, a well-known analyst in the cryptocurrency industry, is confident that Bitcoin will be fully uncorrelated with traditional markets. 

If you have any questions and comments on Bitcoin today, use the form below to reply.

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