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

October 24, 2020

A recent report from institutional cryptocurrency firm Fidelity Digital Assets concluded Bitcoin (BTC) has very little price correlation with major financial assets based on data from the past five years. Over the course of 2020, Bitcoin has gained greater adoption in mainstream finance, which could logically affect the correlation or the lack of the asset. Has the bitcoin correlation changed in 2020?

Ria Bhutoria, Research Director at Fidelity Digital Assets, emailed Cointelegraph: “Bitcoin has seen higher positive correlations with other assets over shorter periods of time, particularly during periods of uncertainty and turbulence and even before 2020.”

Amid growing COVID-19 concerns and preventive measures as of March 2020 Bitcoin’s price apparently fell in line with the US stock market. “The increase in the correlation between Bitcoin and other assets was a consequence of a short-term liquidity crisis that affected many asset classes.” , Bhutoria explained about the crash in March. In essence, large numbers of people were quickly selling their financial assets for cash as news of the COVID-19 pandemic became uncertain. She added:

“As a result, the correlation between all of these assets has increased. With regard to Bitcoin, another possible reason could be a major overlap in market infrastructure and between market participants in traditional and digital asset markets. “

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

Fidelity published a detailed report in October entitled “Bitcoin Investment Thesis: The Role of Bitcoin as an Alternative Investment”. The report prepared by Bhutoria touched on a number of issues. A specific segment of the report pointed to Bitcoin’s lack of correlation with other financial assets, including U.S. stocks and gold. Correlation is a hotly debated topic in the cryptocurrency industry.

Using the data from January 2015 to September 2020, the Fidelity Report concluded that Bitcoin performed differently than large assets, indicating that there is virtually no correlation with other markets for this period.. BTC scored 0.11 in a range between -1 and 1. A rating of 1 means that asset prices are exactly in lockstep, while a score of -1 means price actions exactly the opposite. Any asset with a score of 0 moves its own price path without being affected when others move.

In addition to the March crash, many other cases have shown an obvious correlation between Bitcoin and traditional markets, at least at certain points. The element of acquisition could play a role in the equation, making Bitcoin more correlated than it was years ago, an aspect mentioned in the Fidelity report. “Bitcoin is a young commodity that was not tied to traditional markets until recently,” the report said, adding, “As it is embedded in institutional portfolios, it could increasingly be correlated with other assets.”

Bitcoin found widespread adoption in 2020. One sign of this is that several traditional financial players such as MicroStrategy have amassed significant Bitcoin positions. PayPal recently announced plans to add Bitcoin to its platform in 2020 in an attempt to bring the asset even further into the mainstream focus.

“Bitcoin’s long-term correlations with other assets could remain low given Bitcoin’s different risk factors and returns versus other asset classes and their dynamic and narrative use cases,” said Bhutoria, adding:

“Assigning bitcoin to investors with longer time horizons and beliefs could also reduce the magnitude of the spikes in short-term correlations with other assets during times of uncertainty. These are guesses that we will keep updating as we get more data and a better understanding of Bitcoin’s behavior during a protracted crisis. “

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

“All assets tend to have a correlation of 1 in a liquidity crisis,” Pompliano told Cointelegraph in an email that also complies with Bhutoria’s statement. He added:

“We experienced a liquidity crisis earlier this year, so it is natural to expect the correlations to increase during these times. We have been seeing decoupling in the past few weeks and I think we will see a return to low or no correlation in the next few months. “

Before Bitcoin launched in 2009, the 2007-2008 financial crisis caused similar liquidity problems. Since the public often compares Bitcoin to gold, viewing gold during this crisis offers an additional perspective. “We saw that gold fell 30% in the summer of 2008 due to the liquidity crisis, and that all assets tended to have a correlation of 1 at the same time.” Pompliano wrote, adding, “After all, the assets were later resolved and history can teach a great lesson here too.”

Erik Finman, a bitcoin millionaire who invested in BTC in 2011 at the age of 12, is more cautious about bitcoin’s lack of correlation, which may have changed recently. “We’ll have to wait and see,” he said to Cointelegraph, emphasizing:

“I tend to turn to 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 with the world. Any correlation is short term and is enforced by investors. “

Based on the three answers above, Bitcoin appears to maintain at least some correlation with other assets during isolated short-term events.. However, on a broader timescale and scale, BTC continues to prove to be an uncorrelated asset, at least until now.