Analysis: Relationship between Bitcoin and TradFi Asset Types

2023-09-06, 08:07

[TL; DR]

The correlation between U.S stocks and investment-grade bonds increased during the first two weeks of August.

Bitcoin has been correlated with precious minerals like gold and silver for over two years now.

A rise in institutional adoption of cryptocurrencies results in stronger crypto correlation with traditional investment assets.

Introduction

During bitcoin’s early days between 2009 and 2010 it lacked correlation with most assets which made it highly unique. It was truly independent of the turmoil that affected different types of assets like stocks, forex markets and commodities.

However, the increasing awareness of the essence of Bitcoin and institutional adoption have resulted in correlations between bitcoin and other asset types. This article explores bitcoin’s correlations with other assets including stocks and commodities.

Bitcoin Correlations with Traditional Financial Assets

During the past few years bitcoin has become increasingly correlated with several asset types. For example, it is correlated with major stocks, precious minerals and other cryptocurrencies like ETH. There are different explanations why bitcoin is correlated to these assets.

In October 2022 the Multidisciplinary Digital Publishing Institute explained the correlation between crypto assets and different traditional investment instruments. First, it concluded that the BTC correlation with other asset types is stronger in the long-term timeframe than the short-term one. The main reason for this is that bitcoin has high price volatility.

The crypto correlations with traditional financial assets emerged during the Covid-19 era. According to the Multidisciplinary Digital Publishing Institute report, bitcoin is positively correlated with several risk assets but negatively correlated with the United States dollar. However, these conclusions may change as new price data comes and emerging trends show up .

Possible Reasons Why Bitcoin Correlates with Several Risk Factors

Before we explore bitcoin correlation with other specific asset types let’s look at the possible causes of the correlations.

First off, bitcoin now correlates with other asset types because it exists on balance sheets of many institutional investment firms. As a result, they make their bitcoin investment decisions based on macroeconomic fundamentals which also affect the prices of other asset types.

As an example, since bitcoin has evolved into a class-asset various economic factors like interest rates and inflation influence its price movements. As we know, these are the factors that also determine the prices of other asset types like commodities, stocks and indices. The following table shows the factors that can influence the prices of cryptocurrencies and stocks.

Read also: Bitcoin Halving: Countdown to Crypto Bull Market

Factors that Influence Prices of Equity Market and Cryptocurrencies - Investopedia

As Investopedia shows the above factors influence the values of different assets including cryptocurrencies and stocks. For example, changes in the gross domestic products of leading economies like the United States have an impact on the values of the different assets like bitcoin and commodities.

If there is a global recession, for instance, the values of assets like stocks, cryptocurrencies and commodities may decrease. However, this does not mean that their prices change by similar margins.

Some traditional financial institutions have introduced digital assets that are linked to bitcoin. For instance, such firms have launched crypto-related investment assets such as crypto exchange traded funds (ETFs). The fact that many asset management institutions provide crypto-related investment instruments has enabled individuals and firms to invest in cryptocurrencies including bitcoin.

Correlation between Crypto-related Stocks and Bitcoin

Let’s turn our attention to specific asset types that are correlated to bitcoin. There are several crypto-related equities like COIN, RIOT and MSTR that are positively correlated with bitcoin. As an instance, the correlation coefficient of BTC/MSTR, BTC/RIOT and BTC/COIN has been close to 1 for the past several months.

To illustrate, the correlation coefficient between bitcoin and MicroStrategy (MSTR) has never been lower than 0.68 since September 2022. On the other hand, ROIT’s correlation fell to 0.75 in June this year while that of Coinbase (COIN) was near zero during May and June.

The following chart shows bitcoin 90-day correlation coefficients with COIN, ROIT and MSTR. This year, however, all these stocks have outperformed bitcoin.

Bitcoin Correlations with COIN, ROIT and MSTR - TradingView

The main reason why the above stocks correlate to bitcoin is that the involved companies like MicroStrategy and Coinbase hold large quantities of BTC. Specifically, the latest on-chain data shows that MicroStrategy holds 152,333 Bitcoin, Coinbase 10,766 BTC and Riot 7,094 BTC.

Bitcoin vs Precious Metals

Likewise, the Bitcoin price is correlated to the values of certain precious metals like silver and gold which fall under commodities. However, in comparison, since 2019 bitcoin is more correlated to silver than gold. According to Jordan Doyle and Urav Soni of the CFA Institute silver has a correlation coefficient of 0.26 while gold has 0.15 against BTC.

BTC Correlation with Active Equity Funds and Bonds

Generally, there is correlation between growth funds and bitcoin. During the first two weeks of August the correlation between bitcoin and US equities and investment-grade bonds increased remarkably.

According to Kaiko, a research firm, the correlation between bitcoin and US equities increased by 40%. Similarly, the correlation between BTC and U.S investment-grade bonds rose by 33% as the following graph depicts.

Correlation between Bitcoin and Traditional Assets - Kaiko

As The Graph shows, since March the correlation between Bitcoin and S&P500 has been higher than that of BTC and bonds. Nonetheless, the level of correlation between BTC and traditional investment assets does not remain constant forever. The volatility of bitcoin, which changes with time, may affect it.

In general, the correlation implies that BTC price moves in a similar direction as that of stocks or bonds. The correlation between bitcoin and these traditional financial assets is likely to increase when many institutional investors accumulate more cryptocurrencies including bitcoin.

Conclusion

Recent on-chain data has shown that there is a correlation between bitcoin and some traditional investment assets like stocks, precious minerals and bonds. However, the level of correlation varies from time to time based on several factors such as the volatility of BTC and the institutional adoption of cryptocurrencies.

FAQs about Bitcoin Correlation

What is the most correlated cryptocurrency?

Bitcoin is the most correlated cryptocurrency. It is correlated with equities, investment-grade bonds, commodities like silver and other cryptocurrencies especially Ether (ETH).

What is correlation analysis of cryptocurrency?

The correlation analysis of cryptocurrency is the study of the relationship between the price movement of a specific crypto asset with the values of other investment instruments like equities, bonds and commodities. For instance, bitcoin is correlated with equities, precious commodities like silver and Ethereum coin.

Which crypto correlates with bitcoin?

At most times, the price of bitcoin is correlated to that of Ether (ETH). However, the correlation between these two major cryptocurrencies changes over time. At certain occasions it is high while at other times it is very low.

Author: Mashell C., Gate.io Researcher

*This article represents only the views of the researcher and does not constitute any investment suggestions.

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