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Bitcoin's Correlation with Other Assets: An Overview
Bitcoin investors are known to frequently draw parallels between BTC's performance and other assets like gold and equities. How much weight should an average investor give to this comparison, though?
In the media, Bitcoin's price trends are often juxtaposed with the performance of other asset classes, with gold and technology stocks being the usual suspects.
When a correlation manifests, it tends to become a major headline. The narrative that "Bitcoin's performance aligns with tech stocks" held prominence throughout most of 2022 and early 2023. Since the correlation has lost its consistency, it has faded from the limelight.
Currently, Bitcoin's correlation with gold is in focus. Following the failures of Silvergate, Signature Bank, and Silicon Valley Bank in March, both assets have seen a surge. These narratives make sense on a superficial level - if Bitcoin is viewed as a speculative asset, it could trade like a tech stock. On the other hand, if it's considered a safe-haven asset, a correlation with gold seems logical.
However, it's crucial to remember that correlations can be temporary. A shared correlation doesn't necessarily imply a long-term market relationship between two assets. In larger timeframes, it's even possible to dismiss correlations altogether.
Let's delve into the one-year correlations of Bitcoin with gold and the NASDAQ to determine if they hold any validity.
The Correlation Analysis: Bitcoin, Gold, and NASDAQ
Year-to-date, Bitcoin has grown by roughly 58%, leaping from $16,600 at the beginning of the year to over $26,000 now. During the same period, the NASDAQ has gained about 36%, rising from 11,000 to just under 15,000.
Gold, in contrast, has increased just over 7% YTD.
Based on the 90-day correlation coefficient, Bitcoin currently shows a positive correlation with gold (0.58) and a negative correlation with tech stocks (-0.65). For most of this year, Bitcoin has exhibited high correlation with both assets. At the onset of the year, its correlation with gold was significantly negative, while it hovered just below neutral with tech stocks.
So, is Bitcoin's correlation a sign of a safe haven or a risky asset? Or does the existence of multiple correlations indicate no significant correlation? Does similar yearly price action even denote a meaningful relationship between two assets?
These questions could extend the discussion considerably. They should be considered rhetorical, implying there could be countless assets displaying similar price patterns on a one-year chart.
When we evaluate the question in terms of percentage gains, the picture alters again: gold has increased by 9%, Bitcoin by 18%, and the NASDAQ by 30%.
It would be valuable to derive some meaning from Bitcoin's periodic correlation with equities. Yet, the relationship between the two has been consistent through the banking crisis beginning in March, which triggered a significant Bitcoin rally. Following this, the relationship vanished as the NASDAQ soared to YTD highs and Bitcoin mostly traded sideways.
The Long-Term Perspective: Everything Eventually Breaks Down
Over the past 14 years, Bitcoin has risen against the US dollar by tens of millions of percentage points. Few other asset classes can boast similar returns. Other assets also lack the same level of volatility, making a long-term correlation even less probable.
Since early 2009, gold has jumped from $800 to $1,945 today, an increase of nearly 150%.
The NASDAQ has increased more than 10x since early 2009, yielding returns above 1,000%. These are impressive gains, but they pale in comparison to Bitcoin's return of 52,000,000% from July 2010 to the present.
Here are some important conclusions:
- An asset that soars by more than 50,000,000% during its lifespan may not correlate significantly with anything else.
- The correlations between Bitcoin, gold, and tech stocks typically disappear on timeframes longer than a year or two.
- Largely due to the first two points, these correlations might not hold much importance.
Investors should bear these points in mind while interpreting markets. Relying on any specific correlation as part of an investment strategy can be risky, as correlations may dissolve unexpectedly.
