Bitcoin Correlations

dcresearch
May 4 · 4 min read

Fundamental correlations between bitcoin and other global financial asset classes have tended to shift over longer time periods, and by data, are not as established as correlations between more traditional asset classes.

Exampli gratia, we know the strong inverse correlation between USD and gold, that is well documented and reliable. In this article we gathered data from multiple sources to get a holistic view on bitcoin’s correlation between S&P500, gold, and different indexes, during first quarter (Q1) of 2019. As bitcoin grows as a global asset class, the correlation data will be one of the essential indicators we’d all be following.

There’s a clearly growing demand for safe havens as risk sentiments change. During market cycles and situations like: Turmoil, macroeconomic concern, or geopolitical risk, investors are eager to reallocate into the perceived safety of “safe haven” assets like bitcoin. As a decentralized digital currency that is, by definition, entirely independent from any single central bank, economy, government, or political party, bitcoin has a very real potential to serve as the perfect hedge for traditional assets, i.e. digital gold.

“Bitcoin has an asymmetric return profile — there is much more upside than downside in owning the asset. The downside is capped at the total amount of capital invested, yet the upside is ~100X+.” -Anthony Pompilano.

Is bitcoin correlated with the stock market? Looking at Q1 bitcoin-SP500 index Spearman correlation, the answer seems to be increasingly: No. Highest point of correlation between SP500 was 0,12 on February 10th. Correlation has since weakened, dropping all the way to 0,04 for 31.3.2019. The weakening correlation supports the “digital gold” theory, which showcases bitcoin as a non-correlated asset and hedge to traditional markets.

Looking back to late Q4 2018, bitcoin’s price stayed relatively flat as tech stocks (FAANG) dropped. Contrary to popular tech stocks and their underlying companies, bitcoin is not dependent of profitability or any sales. Bitcoin lacks debt overhang and has no stockpile of goods that needs to be sold, bitcoin just grows on adoption.

Bitcoin was created just after the 2008 subprime crisis, by the end of Q1 2019, macro level indicators are showing signs of slowdown again. When the end of cycle approaches, we’ll see the performance of bitcoin as alternative investment and hedge.

When comparing bitcoin with SPDR Gold Shares (GLD), the correlation is clearly negative during first months of Q1, peaking at -0,05 on Jan. 30th. By the end of quarter, correlation has been moving towards 0,3 showing some linear relationship with the two assets. Bitcoin the “digital gold” is clearly slightly correlated with gold.

Bitcoin’s and gold’s value propositions are close to each other, both promise to be a hedge to mainstream stock market in cyclical downturn events. Both represent alternative currencies, bitcoin’s edge being in censorship-resistance and cross-border transactions, while gold is a more mainstreamly accepted alternative investment.

Although bitcoin & gold investor bases are somewhat overlapping, the competition is fierce, as illustrated by a recently launched marketing campaign by Grayscale Investments (dropgold.com):

The Bletchley 10 Index is a market capitalization weighted index composed of 10 of the most valuable digital assets by market capitalization. The MCAP of each member is calculated off of the expected total supply in 2050 for each asset, then adjusted to reflect the publicly current available amount (float) of each asset available today. There are no limits set on the weight of any individual constituent. The market capitalization of each asset spans from $2 billion to $300 billion USD.

The Bletchley 10 uses liquidity rule, dominant exchange rule, MCAP ranking, and no pegged assets as exclusion criteria. Bletchley 10 index’s correlation with bitcoin has been expectedly high, as bitcoin is heavily weighted in the index. Bitcoin also leads the correlated cryptocurrency market in general. The highest point of correlation was in February 2nd with 0,945. Bletchley 10 shows bitcoin’s dominance in the market as leading indicator for top 10 cryptoassets.

The Bitwise 10 Large Cap Crypto Index (BITX) tracks the total return of the 10 largest cryptoassets, as measured and weighted by free-float and 5-year inflation-adjusted market capitalization. The BITX currently consists of BTC, ETH, XRP, LTC, BCH, EOS, XLM, DASH, XMR, and ZEC.

Bitwise 10 index components at the end of Q1 2019:

Bitcoin 62,9%

Ethereum 11,8%

Ripple 11,4%

Litecoin 3,6%

EOS 3,4%

Bitcoin Cash 2,6%

Stellar Lumens 1,7%

Dash 1,0%

Monero 0,8%

Zcash 0,7%

The BITX correlates strongly with bitcoin’s price as the index is heavily weighted with BTC, 62,9% at the end of Q1. Two biggest weighted altcoins were ETH 11,8% and XRP 11,4%.

Bitcoin has established its position as a leading safe-haven asset. With its charasteristic low correlation with other markets, antifragility, and censorship resistance, BTC will continue to provide long-term added value for smart money.

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Data sources: bitcoin.org. Bitwise. Blockchain Luxembourg S.A. CoinMarketCap. Coin Metrics. dcresearch.

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We create & deliver independent analysis (FA / TA), research, and consulting for emerging digital currency market(s).