What Can Bitcoin Tell Us About Asset Correlations?

Bitcoin (BTC) has often been compared to Big Tech and heralded as "the new tech stock." But what can these correlations really tell us about the future price movements of Bitcoin? Let's take a closer look at the relationship between Bitcoin and various asset types to gain some valuable insights.

Bitcoin's Historic Correlations Vary Across Timeframes

A report published by the Multidisciplinary Digital Publishing Institute revealed several interesting conclusions about Bitcoin's correlations with traditional financial assets. Here are some key takeaways:

• Long-term correlations are stronger than short-term correlations due to Bitcoin's extreme volatility.
• Bitcoin becomes more positively correlated with risk assets during extreme shocks, such as the COVID-19 pandemic.
• Bitcoin can serve as a hedge against the U.S. dollar, being negatively correlated with it.

While these points may need to be re-evaluated with newer price data, they offer valuable insights into Bitcoin's relationship with different assets.

Crypto-Specific Stocks

Several crypto-related stocks have shown a strong correlation with Bitcoin. The 90-day correlation coefficients for BTC/MSTR, BTC/COIN, and BTC/RIOT have remained near 1 for the past few months. These stocks can serve as proxies for Bitcoin, especially for investors who cannot directly buy Bitcoin through a brokerage account.

The close correlation between these stocks and Bitcoin can be attributed to the significant Bitcoin holdings on their balance sheets. MicroStrategy leads the pack with the most Bitcoin holdings among public companies, followed by Coinbase and Riot Platforms.

Precious Metals

When it comes to commodities and precious metals, silver has been the most closely correlated with Bitcoin since 2019. A report by the CFA Institute found that silver exhibited a stronger correlation with Bitcoin compared to gold. This correlation may be due to silver's greater volatility in comparison.

Passive and Active Equity Funds and Bonds

Growth funds tend to show a stronger correlation with cryptocurrencies than value funds. Small-cap growth funds, for example, have a higher correlation coefficient with Bitcoin compared to small-cap value funds. Crypto markets as a whole are weakly sensitive to interest rate dynamics and have shown little to no correlation with bonds.

Bitcoin's Correlations Are Not a Crystal Ball

It's important to note that correlations between Bitcoin and other assets can change rapidly due to Bitcoin's price volatility. While the data provides insights into past correlations, it should not be relied upon as a crystal ball for future predictions. Crypto-specific stocks are likely to maintain their correlation due to Bitcoin holdings, while correlations with commodities and equity funds may shift in the future.