The past month and a half have been a rough time to be a Bitcoin investor. After seeing its value rise from $5,850 in late June to almost $8,400 on July 24 it has been on a slippery slope with a few short dead cat bounces and has fallen back to just above $6,000.
[Editor & Author’s note: Investing in cryptocoins or tokens is HIGHLY SPECULATIVE and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment. If one does invest in cryptocurrencies it should only be with a very small percentage of their investable assets.]
[Author’s note: There is no official price for Bitcoin, so I use round numbers and reference Yahoo! Finance data.]
There are multiple reasons that Bitcoin and cryptocurrencies (CCs) have been under pressure recently ranging from a Hong Kong Bitcoin exchange announcing that it had frozen a client’s account due to them initiating “an unusually large long position order (4,168,515 contracts)” which was almost $420 million to the SEC delaying a decision on VanEck’s request to list and trade SolidX Bitcoin Shares.
One reason to own Bitcoin and other cryptocurrencies
However, one of the reasons to own Bitcoin and CCs is that they are not correlated with other assets . Investopedia defines correlation as, “A perfect positive correlation means that the correlation coefficient is exactly 1. This implies that as one security moves, either up or down, the other security moves in lockstep, in the same direction. A perfect negative correlation means that two assets move in opposite directions, while a zero correlation implies no relationship at all.”
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While digital currencies shouldn’t be thought of as an asset investors will flock to in times of uncertainty, not being correlated to other asset classes could be worthwhile if the markets become under a lot of stress and almost all of them are sold off.
Fundstrat’s Alex Kern and Ken Xuan compare Bitcoin and other CCs to other asset classes such as the S&P 500, U.S. Dollar, International equities, U.S. Bonds, Commodities, Gold and Oil. What they found is that there is a very low correlation between Bitcoin and other CCs and pretty much all of these other asset classes.
In the upper right quarter of the chart below their analysis shows that the closest correlation between Bitcoin and other CCs (depicted as the FS CryptoFX Indexes Fundstrat developed and tracks) is in the high-teens with about half of all the comparisons in the single digits. This means that Bitcoin’s and the other CCs price movements are not tied to these other asset classes.
NBER working paper supports Fundstrat analysis
The National Bureau of Economic Analysis published a working paper this month that supports Fundstrat’s findings. It compared Bitcoin, Ripple and Ethereum to stocks, currencies, commodities and macroeconomic factors. The 25 page report did a detailed economic analysis and found that “cryptocurrency returns can be predicted by factors which are specific to cryptocurrency markets. Specifically, we determine that there is a strong time-series momentum effect and that proxies for investor attention strongly forecast cryptocurrency returns.”
Their main conclusion was that “only cryptocurrency market specific factors – momentum and the proxies for investor attention – consistently explain the variations of cryptocurrency returns. This suggests, in contrast to popular explanations, that markets do not view cryptocurrencies similarly to standard asset classes.”
While both analyses do not indicate that Bitcoin and CCs are worthwhile investments, they do show that if an investor wants an asset that is not correlated with other asset classes that they are vehicles to explore.