Bitcoin Outperforms and Breaks Off Correlations with Traditional Assets
One of the biggest companies to disclose a big Bitcoin purchase is Square, which announced on Oct. 8 that it had purchased $50 million worth of Bitcoin. This announcement seemed to fuel a surge in Bitcoin’s price from around $10,500 to quickly surpass various resistance levels. PayPal’s announcement on Oct. 21 that it is entering the cryptocurrency market and allowing customers to buy, sell and hold various cryptocurrencies further propelled Bitcoin prices higher.
Year to date, Bitcoin has so far outperformed traditional assets and indices compared in the table and chart below:
Performance of BTC vs Other Assets
If $100 was invested in Bitcoin at the beginning of 2020, it would have become $190 as of Oct. 28, compared to $126, $133 or $96 if the same amount was invested in gold, the Nasdaq 100 or the Dollar Index respectively
Bitcoin Performance vs Traditional Assets and Indices
Bitcoin’s Correlation With Different Assets Over Time
The table shows that Bitcoin’s correlation with commodities increased throughout the year and started to break off in October — the increase could potentially be explained by investors’ risk-aversion towards traditional markets given the uncertainties from COVID situations and overall political environments.
Bitcoin showed significant correlation with the equity markets in Q1 2020, largely because all markets sold off (BTC, equities and commodities alike) when there was a flight to liquidity. However, once the financial stimulus packages of various governments were announced, prices for various financial assets — BTC, commodities and equities — recovered rapidly. This again resulted in significant correlation of these asset classes, which made people brand BTC as a risk-asset, like equities, when there was a flight to liquidity.
One of the key narratives around Bitcoin prices is that monetary stimulus in the U.S. is positively impacting Bitcoin as an alternative investment solution to hedge against potential inflation — this could explain the negative correlation with the U.S. Dollar Index (DXY), which reflects the relative strength of U.S. dollars against a basket of currencies.
Given the overall sentiment that Bitcoin is increasingly being adopted by corporations for operations and as reserve currencies — as well as institutional investors buy in — it is expected that the correlations will break off from these traditional assets further and Bitcoin would serve as an alternative solution that offers investors diversification opportunities. This would in turn drive the awareness as well as performance of Bitcoin as the key representative of an appealing asset in the cryptocurrency space.
Rolling 30-Day Correlation With Various Assets and Indices
Bitcoin Correlation With Commodities
Bitcoin Correlation With US Equities
Bitcoin Correlation With Currencies
Bitcoin’s correlation with the U.S. Dollar Index (DXY) started to drop and became negative starting in mid-late April 2020, which coincides with when Brian Armstrong, CEO of Coinbase, revealed that many of the deposits/buys are same size as the $1,200 stimulus check. As such, the correlation could potentially be explained by the financial stimulus package, which made the U.S. dollar weaker compared to other currencies, while a portion of the stimulus might have actually flowed into Bitcoin and the cryptocurrency market.