Bitcoin and Cryptos: Are They Still Their Own Asset Class? By, D.R. Barton, Jr.

I’m really excited for spring to come to my home state of Delaware here on the east coast of the U.S. But after one warm spell last week, we’ve been hit with chilly weather and even had frost warnings over the last couple of nights.

Despite the short-term weather, my backyard is starting to come alive. I found two weeds growing in a mulch bed and had to look them up to see what they were before pulling them. One I found was a common chickweed. It has shallow roots and it’s easy to pull.

The second was more interesting:

While everything is still brownish in the picture, the reddish looking leaves don’t belong to a weed at all.

The plant is known as Coral Bells and is an evergreen perennial that sells for $7.99 a pop in a 4-inch pot. So, classifying things actually proved useful…

Similarly, that’s what I found when looking at cryptocurrencies many years ago. They didn’t seem to correlate to anything else, so almost exactly three years ago I did the correlation research and I wrote a series of articles where I explored the correlation of Bitcoin to many other asset classes. I concluded that bitcoin (as a proxy for many of the cryptocurrency assets) was becoming its own asset class, not following the patterns of any other assets out there.

And with all the wild market gyrations taking place, I wanted to see if bitcoin was still fairly uncorrelated to other asset classes. As you’ll see below, I’ve also found a very interesting shorter-term correlation brewing.

To show visually (and mathematically) how two assets relate to each other, analysts like to look at their correlation coefficient which is a measure of the interdependence of two variables. It ranges in value from −1 to +1, with -1 indicating perfect negative correlation, absence of correlation at zero, and perfect positive correlation at +1.

In even simpler terms, two things are correlated if they usually move in the same direction at the same time. This is the case almost all the time for the S&P 500 index and the Nasdaq index. They both tend to move up or down at the same time, though one might move more in that direction for any given timeframe.

Here’s a current chart of those two indexes in the stockcharts.com chart that I use to measure the correlation of two instruments, with some explanatory notes below:

Notes for Red Circles Above:

1 & 2: The dark line (#1) is the S&P 500 index and #2 shows its numeric scale on the right side of the chart.

3 & 4: The purple line (#3) is the Nasdaq index and the #4 shows that its scale is on the left side of the chart.

5: This is a scale for the correlation coefficient between the S&P 500 and the Nasdaq. The scale runs from the highest level 1.00, which would mean a perfect correlation or that the two instruments always move in the same direction. A reading of -1.00 is perfect inverse correlation, meaning that the two instruments always move in the opposite direction of each other. A reading of 0 means non-correlated or that the two have no relationship to each other

6: You can see that the S&P 500 index and the Nasdaq are highly correlated. This chart shows the correlation coefficient smoothed for the movements over 50 trading days (about 2 ½ months). And the correlation between the two is usually in the high 90s (currently at 0.96).

7: Periods of lower correlation do happen, like in early 2021 when the mega tech stocks like Facebook (FB), Amazon (AMZN), and Alphabet/Google (GOOGL) went through corrections while the S&P 500 barely dropped. But you can see that for almost all periods the correlation is very high.

With that overview for comparing correlation coefficients of two different instruments, let’s look at bitcoin—the new-ish kid on the block. Look at that same chart showing the correlation between the S&P 500 (dark line, right side scale) and this time, bitcoin (purple line, left side scale):

Red Numbered Dot Explanations:

  1. The up, down, up, down that we see in early through 2019 actually goes back to 2016. During that whole period, it would swing from inversely correlated to strongly correlated and back again. This is just a clear indication that there has been no correlation pattern between the broad U.S. stock market and bitcoin.
  2. Interestingly, The S&P and bitcoin became more correlated for the 15-month period from early 2020 to spring of 2021 only to see…
  3. …Modest inverse correlation to modest positive correlation in multiple cycles since then.

I don’t think it’s wise to overthink this. The S&P and bitcoin still act like non-correlated distinct assets, though I couldn’t argue if you said they were more correlated in the past two or so years.

Let’s look at some other asset classes (all of which showed no discernable correlation to bitcoin in the 2015–2019 time frame):

How about when we compare bitcoin to gold?

Gold is even more bouncy—up, down, up, down. I don’t think that gold has been treated as an inflation hedge for quite some time. But I do think that in the early part of the Ukrainian invasion it acted as a flight to safety. And clearly bitcoin has been treated as neither a flight to safety nor inflation hedge with any consistency…

How about bitcoin’s correlation to Oil?

Still extremely uncorrelated! Maybe some correlation with Bonds?

I’m not even going to draw up and down arrows on this one! There is clearly no consistent correlation relationship here!

Since bitcoin is supposed to be a currency, let’s see if it is correlated with another currency. A note of explanation: Bitcoin can be denominated in any other currency just like gold can or oil can. But right now, the reserve currency that most commodities are priced in is still U.S. dollars. Knowing that, our chart below, comparing Euros denominated in U.S. dollars to bitcoin denominated in U.S. dollars, is an apples-to-apples comparison:

Not even close to a consistent relationship.

But I did tell you above that there is a budding correlation that is interesting. I have thought for some time that investors and traders are treating extreme “risk on” investments similarly. So perhaps bitcoin has some correlation to meme stocks. Let’s look at a correlation chart with the original meme machine—GameStop:

GameStop (GME) was just like any other stock until early 2021 when it exploded into the public limelight. And there was no real relationship with bitcoin until late in the year. But since November, bitcoin’s correlation to GME has been growing and has stayed high.

So perhaps bitcoin is, for now, most correlated with extreme “risk on” stocks. And that actually makes a bunch of sense to me.

As always, I love to hear your feedback! Please email your thoughts to me at drbarton “at” vantharp.com about the article or about bitcoin as an asset class.

Great trading and God bless you,

D. R.

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