[Ed note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]
As a borderless digital asset not controlled by governments or centralized companies, bitcoin’s price should, in theory, travel its own path, independent of other currencies and markets. Crypto’s pioneer asset, however, has seen varied views suggesting correlations to traditional markets, such as stocks, “safe-haven” investments such as gold, or even arguments that bitcoin is not correlated to anything. Available data shows no firm answer, as bitcoin’s correlation seems to change with the wind, while a number of experts have varying thoughts on the matter.
“I believe that bitcoin does have a correlation with traditional stock markets because they are both private assets,” analyst and trader Tone Vays told me in a March 18 comment. “Bitcoin benefitted a lot from the ten year bull market because people got generally wealthier, and they were more willing to speculate on something like bitcoin,” Vays added, mentioning the thriving market seen over the last decade.
Vays expects a positive reaction from bitcoin during relatively uncertain economic times, such as a country’s withdrawal from the eurozone for example. “People will be scared, but they still have their jobs and they’re looking for a place exit,” he said, referencing people prospecting for investment opportunities.
The analyst, however, said the current situation differs. “When it comes to a major situation like we have now with the markets crashing, and people worrying about their jobs, they’re not going to speculate on bitcoin,” Vays said. As an asset that has only been in existence for roughly 11 years, the analyst explained bitcoin is not yet primed to take the place of cash across the globe.
Amid global coronavirus fears and oil trade wars, recent days have seen traditional markets plummet. The Dow Jones Industrial Average (DJI), a common barometer for market health, fell more than 20% from its 2020 highs by March 11, and faced continued decline in the days following. Bitcoin suffered similar carnage around the same time frame, diving from $10,500 on February 12, down to $3,870 by March 13.
Between March 12 and 13, BTC fell from $8,000 down to $3,870, while the Dow fell from 22,840 to 21,150, according to TradingView.com price charts. The Dow’s March 12 drop totaled over 7% — which is less damage comparative to bitcoin’s dump, but still a severe market loss by traditional market standards.
Bitcoin Sometimes Travels Its Own Path
Bitcoin’s price has not always travelled in line with traditional markets, however. Based on bitcoin’s chart, compared to the S&P 500 index, another popular mainstream benchmark, crypto’s pioneer asset has acted oppositely at times.
An article from Cointelegraph compared historical price data between 2018 and 2019 from the S&P 500 and bitcoin, showing inconclusive data for any firm trend. At times, bitcoin did not react, or acted oppositely when the S&P 500 moved sharply. During other periods, the two seemingly moved in sync.
According to Vays, bitcoin’s price does not follow traditional markets during times of decreased price swings, also known as low volatility, sometimes seen when markets are level or marginally trending upward. “If the volatility of the stock market isn’t huge, bitcoin is not correlated at all,” he said. “When the market is going up very quickly, or when the market is crashing, I believe there is a correlation to bitcoin because they’re both private assets.”
In recent days, amid the mentioned traditional market fears and falling prices, bitcoin has held rather steady. Specifically, on March 16, the Dow suffered another red day, while bitcoin traded largely sideways, ranging between $4,450 and $5,370, rather than posting new 2020 price lows like the Dow. The asset has held strong since March 16, regardless of traditional markets, sitting at a press time price of $6,648.
Crypto’s Largest Coin Stated As A ‘Non-Correlated Asset’
Morgan Creek Digital cofounder and crypto aficionado Anthony Pompliano noted bitcoin’s comparative action in a March 16 tweet. “Bitcoin is basically flat today and the stock market is down double digits,” he said.
“Don’t hear many people yelling about ‘BITCOIN IS CORRELATED!’ today,” Pompliano added. “Truth is correlation doesn’t matter over short periods of time. Over months and years, bitcoin remains a non-correlated asset.”
Over the years, Pompliano has piped up many times, defending his stance of bitcoin as a non-correlated asset. “Bitcoin is definitely a non-correlated asset,” Pompliano told CNBC in a December 2018 interview. “If you look at the correlation between the digital asset and the S&P 500 over the last 180 days, it’s at zero,” he noted. “If you look at it compared to the dollar index, it’s near zero,” he added.
As of a January 2020 interview with Cointelegraph, Pompliano said his position on the matter had not changed. “The most important part of bitcoin, when it comes to the global hedge, is the fact that it’s a non-correlated asset — meaning that, as stocks go up or down, bitcoin doesn’t have correlation to that,” he told the media outlet.
Centralized Investor Population
Emmanuel Goh, CEO of crypto analytics company Skew, explained bitcoin’s price action relative to stock market investors. The top 10% wealthiest households own 84% of available U.S. stocks according to a 2016 report from the National Bureau of Economic Research (NBER). Goh told me Baby Boomers comprise most of these numbers while holding almost no bitcoin. “Millennials who own bitcoin also have a small allocation to stocks,” he added.
“That should make, in theory, bitcoin more immune to liquidations and margin calls during a global sell-off,” Goh explained. “Bitcoin was still down 10% in sympathy today – a muted reaction in our view given the context for global markets and bitcoin high volatility,” he said on March 9, noting a relatively small move for bitcoin given its regular tendencies.
As bitcoin continues to age, gaining further recognition with time, the asset may develop a more predictable correlation or lack of correlation to traditional markets or world events. At this point, however, crypto’s pioneer asset appears to be finding its way one step at a time, changing its correlation at times.
Disclaimer: I actively trade cryptocurrencies, as well as hold a small amount of BTC, ETH, LTC, XMR, NEO, ZEC, BEAM, BCH, DASH, LINK, XTZ and various insignificant other altcoin positions.