Bitcoin’s correlation with tech stocks and its inverse relationship with the US dollar has been a topic of discussion in the financial media. These correlations have often been used to predict future price movements of Bitcoin. To gain more insight into this, let’s explore several reports that analyze the relationship between Bitcoin and different asset types.
A report published by the Multidisciplinary Digital Publishing Institute in October 2022 arrived at several key conclusions regarding Bitcoin’s correlations with traditional financial assets. It found that long-term correlations are stronger than short-term correlations due to the extreme volatility of the Bitcoin market. Additionally, it noted that the positive linkage between Bitcoin and risk assets increases during extreme shocks like the COVID-19 pandemic. Bitcoin can also be positively correlated with risk assets and serve as a hedge against the US dollar.
Although some of these points may need to be reassessed with newer price data, there is still value in examining them. Other researchers have delved deeper into the relationship between Bitcoin and specific assets during specific timeframes.
Certain crypto-related stocks have shown a higher correlation with Bitcoin than any other assets in the market. The 90-day correlation coefficient for BTC/MSTR, BTC/COIN, and BTC/RIOT has remained near 1 for several months. Investors may choose to use these stocks as proxies for Bitcoin, as they have outperformed it this year while also exhibiting greater volatility. This close correlation can be attributed to the fact that these companies hold a significant amount of Bitcoin on their balance sheets.
In terms of correlation with commodities and precious metals, silver has shown a stronger correlation with Bitcoin compared to gold. A report by the CFA Institute found that silver has been the commodity most closely correlated to Bitcoin since October 2019, with a correlation coefficient of 0.26. Gold, on the other hand, had a correlation coefficient of just 0.15, possibly due to silver’s higher volatility.
When considering the correlation between Bitcoin and stocks as a whole, looking at an index or exchange-traded fund would provide a more comprehensive comparison. Growth funds generally exhibit a stronger correlation with cryptocurrencies compared to value funds, possibly due to their speculative nature. The correlation coefficient between small-cap growth funds and Bitcoin is 0.41, while it is 0.35 for small-cap value funds.
Passive and active bond funds have shown little to no relationship with Bitcoin. The correlation coefficients for passive and active bond funds were 0.11 and 0.13, respectively. This suggests that Bitcoin is weakly sensitive to interest rate dynamics that often impact equities.
It is important to note that Bitcoin’s correlations can change rapidly due to its large price swings. However, the data presented here provides an accurate picture of the assets that have been closely correlated with Bitcoin in the recent past.
Moving forward, crypto-specific stocks are likely to maintain a strong correlation with Bitcoin due to their Bitcoin holdings. However, the correlation with commodities and equity funds could quickly change course. It is crucial for investors to conduct their own research and make informed decisions when it comes to investing in Bitcoin or any other asset.
Disclaimer: This article does not provide investment advice or recommendations. Readers should conduct their own research before making any investment decisions, as all investments involve risk.
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