While many bitcoin investors seek the asset to act as a safe haven, bitcoin has generally acted as the riskiest of all risk allocations.
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Short term price versus long term thesis
How bitcoin, the asset, will behave in the future compared to how it currently trades in the market turned out to be radically different from our long-term thesis. In this article, we take a closer look at these risk correlations and compare the returns and correlations between bitcoin and other asset classes.
Consistently, tracking and analyzing these correlations can give us a better understanding of if and when bitcoin has a true decoupling moment from its current trend. We do not think we are in this period today, but we expect decoupling to be more likely over the next five years.
Macro Drive Correlations
To start, we look at one-day return correlations for bitcoin and many other assets. Ultimately, we want to know how bitcoin is performing against other major asset classes. There are many stories about what bitcoin is and could be, but that’s different from how the market trades it.
Correlations range from negative one to one and indicate the strength of a relationship between two variables, or asset returns in our case. Typically, a strong correlation is above 0.75 and a moderate correlation is above 0.5. Higher correlations show that assets are moving in the same direction, with the reverse being true for negative or inverse correlations. Correlations of 0 indicate a neutral stance or no real relationship. Looking at longer time windows gives a better indication of the strength of a relationship because it suppresses volatile short-term changes.
The most observed correlation with bitcoin over the past two years is its correlation with “risky” assets. Comparing bitcoin to asset classes and traditional indices over the past year or 252 trading days, bitcoin is most correlated with many risk benchmarks: S&P 500 Index, Russel 2000 (small capitalization), QQQ ETF, HYG High Yield Corporate Bond ETF and the FANG Index (high growth technology). In fact, many of these indices are highly correlated with each other and show how highly correlated all assets are in the current macroeconomic regime.
The chart below compares bitcoin to some key asset class benchmarks on high beta, stocks, oil, and bonds.
Another important note is that bitcoins trade on a 24/7 market, unlike these other assets and indices. Correlations are likely underestimated here, as bitcoin has been shown to drive broader risk or liquidity market movements in the past, as bitcoin can be traded at any time. As the CME Bitcoin futures market has grown, using this futures data produces a less volatile view of correlation changes over time, as it trades within the same time bounds. than traditional assets.
Looking at the rolling 3-month correlations of Bitcoin CME futures against a few of the risk indices mentioned above, they all track pretty much the same thing.
Although bitcoin has had its own industry-wide capitulation and deleveraging event that rivals many historical bottoming events we’ve seen in the past, these relationships with traditional risk don’t have much exchange.
Bitcoin ultimately acted as the riskiest of all risk allocations and a liquidity sponge, performing at any sign of increased liquidity returning to the market. It reverses at any sign of rising equity volatility in the current market regime.
We expect this dynamic to change significantly over time as the understanding and adoption of Bitcoin accelerates. This adoption is what we see as the asymmetric advantage of how bitcoin trades today versus how it will trade in 5-10 years. Until then, bitcoin’s risk correlations remain the dominant force in the near-term market and are key to understanding its potential trajectory over the coming months.
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