Bitcoin Still a Risk Asset: The Correlation with Equities
Bitcoin, the world’s first decentralized digital currency, has been making headlines for its meteoric rise in value. With a market capitalization surpassing $1 trillion, it’s often referred to as “digital gold” or “new gold 2.0.” However, despite its unique features and the narrative of being a store of value and hedge against inflation, recent studies reveal a strong correlation between Bitcoin and traditional equities.
Correlation with Equities: An Inconvenient Truth
Investors and analysts have long argued that Bitcoin acts as a hedge against traditional markets, especially during times of economic uncertainty. However, a study published by JPMorgan Chase & Co. in late 2021 challenged this notion. According to the research, Bitcoin’s correlation with equities has been rising since 2019.
- The correlation coefficient between Bitcoin and the S&P 500 reached an all-time high of 0.73 in October 2021.
- Historically, the correlation coefficient between Bitcoin and the S&P 500 averaged around 0.10 between 2013 and 2017.
- The correlation between Bitcoin and the tech-heavy NASDAQ Composite index has been even stronger, at 0.83 in October 2021.
These findings suggest that Bitcoin is not an uncorrelated asset, as some proponents claim, but rather a risk asset that moves in tandem with the broader stock market.
Implications for Individual Investors
For individual investors, this correlation means that a diversified portfolio that includes both Bitcoin and traditional stocks might not offer the desired risk reduction benefits. Instead, it could lead to increased overall portfolio risk.
Moreover, during periods of market stress, such as the March 2020 sell-off, Bitcoin’s correlation with equities could result in significant losses. While Bitcoin’s volatility may offer some protection against inflation, its correlation with equities could make it a riskier asset class for those seeking to hedge against market downturns.
Implications for the Global Economy
At a broader level, the correlation between Bitcoin and equities has implications for the global economy. Market participants often view Bitcoin as a hedge against fiat currencies and a potential safe-haven asset. However, its strong correlation with equities could complicate matters for central banks and financial regulators.
Central banks might view Bitcoin as another asset class subject to market risks rather than a currency or a store of value. As a result, they might be less inclined to tolerate the use of Bitcoin as a hedge against their currencies or as a means of payment for international trade.
Conclusion
Bitcoin’s correlation with equities is a reality that challenges the narrative of it being an uncorrelated, non-traditional asset class. While it might offer some benefits as a hedge against inflation, its strong correlation with the broader stock market could increase overall portfolio risk for individual investors. At a macro level, this correlation could have implications for central banks and financial regulators, complicating their efforts to manage the risks associated with digital currencies.
As the digital currency landscape evolves, it’s essential to stay informed about the latest research and developments. By understanding the true nature of Bitcoin and other digital currencies, investors can make informed decisions and manage their risks more effectively.
