A recent report by institutional crypto firm Fidelity Digital Assets concluded that Bitcoin (BTC) shows very little price correlation with traditional financial assets, based on data from the past five years. During 2020 Bitcoin has been increasingly adopted in mainstream finance, which could logically have an impact on the asset’s correlation or lack thereof. Has Bitcoin’s Correlation Changed in 2020?
Ria Bhutoria, director of research at Fidelity Digital Assets, told Cointelegraph via email: “Bitcoin has experienced higher positive correlations with other assets over shorter time periods, especially during times of uncertainty and uncertainty. turbulence, and even before 2020. “
Amid growing concerns about COVID-19 and prevention measures from March 2020, the price of Bitcoin has fallen, apparently in tune with the US stock market. “The increased correlation between Bitcoin and other assets was a consequence of a short-term liquidity crisis that affected many asset classes,” Bhutoria explained of the March decline. Essentially, a large number of people rushed to sell their financial assets in exchange for cash as times turned uncertain around the news of the COVID-19 pandemic. She added:
“The correlation of all these assets relative to each other has increased accordingly. When it comes to Bitcoin, another potential reason could be greater overlap in market infrastructure and between market players in traditional and digital asset markets. “
Fidelity released a detailed October report titled “Bitcoin Investment Thesis: The Role of Bitcoin as an Alternative Investment. “ Written by Bhutoria, the report covered a multitude of topics. One particular segment of the report highlighted Bitcoin’s lack of correlation with other financial assets, including US stocks and gold. Correlation is a hotly debated topic in the crypto industry.
Using data from January 2015 through September 2020, the Fidelity report concluded that Bitcoin performed differently from traditional assets, signaling virtually zero correlation with other markets for that time period. BTC scored 0.11 in a range of -1 to 1. Using a rating of 1 means that asset prices travel exactly in sync with each other, while a score of -1 means exactly the opposite price action. Any asset with a score of 0 follows its own price path, unaffected when others move.
In addition to the March drop, several other instances have shown an apparent correlation between Bitcoin and traditional markets, at least at times. The element of adoption could play into the equation, making Bitcoin more correlated than in previous years – an aspect highlighted in Fidelity’s report. “Bitcoin is a young asset that until recently was not tied to traditional markets,” the report says, adding: “As it is embedded in institutional portfolios, it could become increasingly correlated with d ‘other assets.”
Related: The Next Big Treasure: Businesses Buy Bitcoin As A Cash Reserve
Bitcoin was widely adopted by the general public in 2020. One sign is that a number of mainstream financial players, such as MicroStrategy, have built up significant Bitcoin positions. PayPal also recently announced plans to add Bitcoin to its platform in 2020, pushing the asset further into the limelight.
“Bitcoin’s long-term correlations with other assets may continue to be low, given Bitcoin’s different risk and return factors compared to other asset classes and its dynamic use cases and narratives.” , Bhutoria said, adding:
“If investors with longer time horizons and beliefs allocate to Bitcoin, the magnitude of peaks in short-term correlations with other assets during times of uncertainty could also ease. These are conjectures that we will continue to update as we gain more data and a better understanding of Bitcoin’s behavior in a protracted crisis.
Over the years, other industry players have also weighed on the price of Bitcoin in line with other markets. Anthony Pompliano, co-founder of Morgan Creek Digital, is a longtime advocate of Bitcoin as an uncorrelated asset.
“All assets tend to have a correlation of 1 in a liquidity crisis,” Pompliano told Cointelegraph in an email, which also matches Bhutoria’s explanation. He further added:
“We saw a liquidity crunch hit earlier this year, so it’s natural to expect correlations to increase during these times. We are seeing decoupling in the last few weeks and I guess we will see a return to low / zero correlation in the next few months. “
Prior to Bitcoin’s launch in 2009, the 2007–2008 financial crisis created similar liquidity problems. As the public often compares Bitcoin to gold, watching gold during this crisis adds perspective. “We saw gold drop 30% during the liquidity crunch in the summer of 2008, as well as all assets tending to a correlation of 1 during the same time period,” Pompliano wrote, adding: “Finally , the assets later decoupled and so history can teach us a great lesson here too.
Erik Finman, a Bitcoin millionaire who invested in BTC at the age of 12 in 2011, has a more tentative approach regarding Bitcoin’s lack of correlation which may change recently. “We have to wait and see,” he told Cointelegraph, stressing:
“I tend to lean towards the fact that Bitcoin is not tied to anything else in the long term, because its value is determined by its own technology and its relationship to the world. All correlations will simply be short term and forced by investors. “
Based on the three responses described above, Bitcoin apparently has at least some correlation with other assets during isolated short-term events. However, on a broader timeline and scale, BTC continues to prove itself as an uncorrelated asset, at least so far.