The old debate is over. Perhaps.
In recent years, a battle of minds has arisen over whether or not the price of Bitcoin is correlated with other financial assets, such as stocks. A recent report from Fidelity Digital Assets brings clarity to the discussion.
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Fidelity’s extensive report, entitled Bitcoin Investment Thesis: Bitcoin’s Role As An Alternative Investment, shows not only a lack of correlation between the price of Bitcoin and conventional financial assets, but higher returns for BTC investors over the long term.
The report says:
„Bitcoin’s correlation with other assets from January 2015 to September 2020 (shown in the table below) is an average of 0.11, indicating that there is almost no relationship between bitcoin returns and other assets.
A correlation of 0.11 exists on a scale between -1 and 1, with a score of 1 meaning perfect correlation, and -1 resulting in opposite price activity, the report clarifies. If Bitcoin had a score of -1, for example, the price of the asset would increase whenever stocks fell. A score of 0 would mean that no other asset movement would affect the Bitcoin price.
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In recent years, Bitcoin has apparently followed a price path, sometimes in line with traditional markets. BTC fell along with equities in March 2020 during initial COVID news. The digital asset, however, recovered much faster, with larger relative gains. More recently, Bitcoin suffered a slight fall in line with equities with news of delays in stimulus funding.
But despite these short-term effects, Fidelity reports that „Bitcoin has distinct underlying fundamentals that are unaffected by the health and economic situation created by COVID-19.
In the report, Fidelity noted that the unrelated nature of Bitcoin may be partly due to a new era of retail interest in investing, driven by social media interest.
The report also discussed the fact that Bitcoin has a number of aspects that are of interest to different constituent investors, arguing that despite the discussion about whether Bitcoin is a store of value or a medium of exchange, „One of the beautiful things about Bitcoin is that its success is not based on serving a single purpose.
The price of digital assets has skyrocketed in the last decade, surpassing parity with the US dollar, gold and other benchmarks, as described earlier by the cryptomoed and creator of the stock-to-flow model, PlanB. In this journey, some people’s perception of Bitcoin has changed from a transactional currency to a reserve value.
Bitcoin’s age also plays a role in its lack of correlation. „Bitcoin is a young asset that, until recently, was not tied to traditional markets,“ the report said. „Because it is integrated in institutional portfolios, it can become increasingly correlated to other assets“.
Bitcoin mainstream trading products have emerged in the crypto space since the launch of the Chicago Mercantile Exchange’s Bitcoin futures trading product in 2017. Since then, Bitcoin options have also appeared in the mainstream market. As noted by the Fidelity report, correlations may begin to appear, now perhaps partially visible in the „Bitcoin CME gap“ theory, around which many crypto currency traders place importance.
In general, however, Fidelity has observed a lack of dominant correlation for prices of crypto assets, citing a Yale University study which looked at several important crypto currencies, including BTC and Ethereum (ETH).
„Based on its analysis, the return behavior of all digital assets, including bitcoin, cannot be explained by risk factors that account for returns in stocks, currencies or commodities of precious metals or by macroeconomic factors such as nondurable consumption growth, sustainable consumption growth, industrial production growth and personal income growth. ”
Morgan Creek Digital co-founder and cryptomoeda industry expert Anthony Pompliano often spoke about Bitcoin as an unrelated asset. In the midst of an uncertain global situation, such an asset may serve as a hedge, at least according to MicroStrategy, a major financial player that recently placed $400 million in BTC.