In recent years, many have wondered whether or not the price of Bitcoin was related to other financial assets, such as equities.
A recent report published by Fidelity Digital Assets sheds light on the subject.
Fidelity’s in-depth study, entitled Bitcoin Investment Thesis: Bitcoin’s Role As An Alternative Investment, not only shows the lack of correlation between Bitcoin’s price and mainstream financial assets, but also points to higher returns for BTC investors over a long-term time horizon.
The report states:
„The correlation of Bitcoin with other assets from January 2015 to September 2020 (represented in the table below) shows an average of 0.11, indicating that there is almost no correlation between Profit Revolution returns and other assets“.
The value of 0.11 is placed on a scale between -1 and 1, where the score of 1 means an impeccable correlation, while -1 represents a completely opposite price action, as specified in the report. If Bitcoin had a score of -1, for example, the price of the asset would increase when the shares go down. A score of 0 would imply that the movements of no other asset affect the price of Bitcoin.
In recent years, there have been times when Bitcoin seems to have traced prices in line with mainstream markets. In March 2020, following the first news about COVID-19, BTC collapsed along with the shares. However, the digital asset recovered much faster, with higher relative gains. More recently, Bitcoin has suffered a slight decline in parallel with equities, caused by the news about delays in grant funding.
Despite these short-term effects, Fidelity reported that „Bitcoin has distinct underlying fundamentals that are not affected by the health and economic situation created by COVID-19.
In the report, Fidelity noted that Bitcoin’s unrelated nature may be partly due to a new era of retail investment interest driven by social media.
The study further discusses the fact that Bitcoin presents a number of interesting narratives for various categories of investors. Despite the debate about Bitcoin’s role as a reservoir of value or medium of exchange, „one of the best features of Bitcoin is that its success does not depend on performing a single function.
Over the past decade, the price of the digital asset has increased dramatically, surpassing the parity with US dollar, gold and other benchmark assets, as described in the past by the crypto analyst and creator of the PlanB stock-to-flow model. During this journey, the perception of Bitcoin for some 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, had no ties to traditional markets,“ explained the report. „As it is integrated into institutional portfolios, it may become increasingly correlated with other assets.
Since the launch of Bitcoin futures on the Chicago Mercantile Exchange in 2017, a growing number of asset-based trading products have reached the crypto industry. Since then, options on Bitcoin have also reached the mainstream markets. As reported in the Fidelity report, correlations may begin to emerge, now possibly visible in part in the „CME gap theory“, to which many crypto traders attach particular importance.
In general, however, Fidelity found a lack of mainstream correlation for crypto asset prices, citing a Yale University study that looked at several major crypto currencies, including BTC and Ethereum (ETH).
„According to this analysis, the return behavior of all digital assets, including Bitcoin, cannot be explained by risk factors justifying returns in stocks, currencies or precious metals, nor by macroeconomic factors such as growth in non-durable consumption, growth in durable consumption, growth in industrial production and growth in personal income“.
Anthony Pompliano, co-founder of Morgan Creek Digital and crypto expert, has often described Bitcoin as an unrelated asset. In an uncertain global situation, such an asset could be a hedge, at least according to MicroStrategy, a major financial operator that recently invested $400 million in BTC.