With the end of 2021, it’s a good time to reassess the idea that crypto-assets (cryptocurrencies) are risk-on assets. Cryptocurrency risk should help determine how to distribute assets in 2022.
For many traders, the massive plunge in March 2020 will still be in memory, whether it was a great pain or a profit. At that time, Bitcoin, Ether ( ETH ), and almost all other crypto assets plunged, as if they were chained around declining stocks and bond rights.
From that time on, we’ve repeatedly heard the claim that crypto assets are risk-on investments, that are, assets that perform well when investors are in a bold mood and perform poorly when they are timid. rice field.
Relationship between Bitcoin and macro assets
Cryptocurrency is a bet on the future of finance, so it may certainly be risk-on. If the currency moves to the blockchain, holding the blockchain currency makes sense.
Here’s an obvious chart. It is a graph showing the correlation.
Bitcoin, S & P 500, Gold, Treasury, Commodity Correlation (90 days)
Source: CoinDesk digital asset price index, St Louis Fed, Yahoo Finance
The black line shows the correlation between Bitcoin and the S & P 500, a leading index on the US stock market. If equities are generally risk-on investments (compared to bonds), we would presume that Bitcoin has a high correlation with the S & P 500 or at least moves in that direction.
But in reality, that is not the case. The 90-day phase relationship between the Bitcoin and the S & P 500 peaked two months ago at about 0.31. This is a pretty weak number. In June, at the bottom of 2021, the coefficient was minus 0.04. In other words, there was no statistical relationship between US stocks and Bitcoin prices.
So let’s add a red line that shows the correlation between Bitcoin and gold. Given that Bitcoin has a supply cap of 21 million, it should be an inflation hedge in a world where the Fed and the U.S. government are looking for new ways to flood the market with dollars. is.
However, this is also no. The 90-day correlation between Bitcoin and gold peaked in 2021 at 0.30 in early January. After that, it stays empty near zero. The lowest was in August, minus 0.18. Currently, it is only 0.07. There seems to be no correlation between gold and Bitcoin.
Now that you’re frustrated, let’s add the last line that shows the correlation with the bond. Bonds are shown in iShares US Treasuries Over 20 Years ETF (TLT, Yellow). If Bitcoin isn’t trading with stocks or gold, wouldn’t it have a close relationship with bonds?
Compared to others, the yellow line stays especially near zero. The same is true for commodities (represented by the iShares S & P GSCI Commodity Index Trust, shown in green).
How does quantitative easing change the correlation?
There are several reasons why Bitcoin does not correlate with these key macro assets. There are also reasons related to the value proposition. It may be because the crypto asset market is still in its infancy and is dominated by a few major players, whether people are trying to admit it or not.
The low correlation with other asset classes means that crypto-assets should be considered at least for portfolios to increase investment diversification.
The disadvantage of crypto assets other than Stablecoin (even the “safest” ones like Bitcoin) is that they are extremely volatile.
Bitcoin and Macro Asset Volatility
Sources: CoinDesk Research, St Louis Fed, Yahoo Finance
Still, the interpretation that Bitcoin correlates with other risk-on assets and gold remains persistent, but what happens in the coming quarters will test that claim, venture firm Ubit.・ Chen Li, CEO of Youbit Capital, said.
He expects risk-on assets to fall as interest rates rise as the Fed gradually curtails its quantitative easing policy (credit yields rise as bond prices fall. The Fed once Such a development is expected because it does not buy as much)
“We will see if Bitcoin can withstand gravity,” Lee said.
Correlation between Bitcoin and Altcoin
Lee sees the correlation not between macro assets, but between Bitcoin and other crypto assets.
Bitcoin and Ether have a very high 90-day correlation coefficient of 0.80. This is despite Ether’s complete defeat of Bitcoin’s returns in 2021, just like any other crypto asset.
Correlation between Bitcoin and other crypto-assets (90 days)
Source: CoinDesk digital asset price index
However, in the case of Ethereum’s competing native tokens, the correlation coefficient is slightly lower. Lee believes that those correlations will diminish as other smart contract platforms become more prevalent. And I think there’s one more factor that’s causing it, which may not be very intuitive. It’s a way assets are traded.
“In centralized and DEX (decentralized exchanges), the number of stable coin pairs, not BTC or Ethereum pairs, is increasing,” Lee said. “Alternative tokens are traded against Stablecoin, which reduces their correlation with Ethereum (or) Bitcoin.”
If crypto assets are traded primarily against other crypto assets such as Bitcoin, they will move together, Lee said. He also said that investing in Stablecoin, which is often pegged by the US dollar, would break the connection between Stablecoin and Bitcoin, and Ether.
If so, 2022 may be the year when the correlation between altcoin and Bitcoin, which has no correlation with macro assets, breaks down. Then it will be a world where at least a quick look at Altcoy will be needed to create a diversified portfolio.
It should be an interesting world.