Chapter 3 : Crypto investing
Correlations : Crypto is growing up
Institutional adoption has driven higher correlations between crypto and other risk assets
Chart 2 : 365-day rolling correlatio other asset classes ( 5 January 20
Author : Stephan Roth
Crypto evangelists have had a long standing infatuation for correlation or , the absence of it . Touted as a safe haven asset , uncorrelated from traditional stocks , bitcoin is supposed to be a hedge against the excesses of Wall Street . Some 13 years later , the market has moved on – bitcoin ' s rising correlation with traditional finance may be a sign of maturity , not a sellout .
A historical indicator by nature , correlations inform investors about the relationship between financial assets and indices . If the price of two assets rises in lockstep , they are said to be positively correlated , with a correlation of 1 indicating a perfect positive correlation . The inverse , a correlation of -1 , would represent a perfect negative relationship .
One key argument for including bitcoin in a portfolio is the promise of diversification from traditional stocks . From 2010 to 2020 , crypto diehards got their wish . Bitcoin ' s correlation to the
S & P 500 remained at negative or low positive levels , indicating that bitcoin did not sing to the tune of conventional assets – a win for the evangelists .
However , much has changed since COVID-19 . Data from 21Shares captures a stark regime change , with bitcoin ' s correlation to the S & P 500 and Nasdaq 100 shooting from a negative correlation of -0.15 to a positive 0.31 between January and April 2020 .
As bitcoin ' s correlation has surpassed a value of 0.5 – a strong positive correlation – and the ‘ decoupled-safe haven ’ hypothesis remains on hold , what can correlations tell us about crypto investors , the current market regime and the future of the industry ?
A brief history
Today , cryptocurrency exchanges like Crypto . com estimate that more than one billion crypto users will enter the space by 2023 , however ,
Chart 1 : Bitcoin 60 day correlations with gold and S & P 500
Source : Coin Metrics , Fidelity Digital : Bitcoin Investment Thesis , October 2020
Chart 3 : Entity transaction volum transacted ( June 2008-August 20
this was not always the case .
In the beginning , only the most avant-garde denizens of the internet dabbled in bitcoin . Not until Laszlo Hanyecz purchased two pizzas for 10,000 bitcoins on 10 May 2010 – marking the first purchase of a real-world good with crypto – did internet locker room talk actually walk its walk . As Paul Vigna and Michael Casey write in Crypto Currency : The Future of Money ?, during this early period in 2010 , bitcoin slowly detached itself from the “ geeky fringes of tech society ” and fell into the hands of a new breed of investor , the “ digital gold digger [ s ]”.
Data from Glassnode indicates