Decoupling Denial: Bitcoin’s Risk-On Correlations

While many Bitcoin investors look for the asset to behave as a safe haven and store of value, bitcoin has ultimately acted as the "riskiest of all risk allocations" and a liquidity sponge.

Feb 15, 2023

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Short-Term Price Versus Long-Term Thesis

How bitcoin, the asset, will behave in the future versus how it currently trades in the market have proven to be drastically different from our long-term thesis. Over the last year, we’ve highlighted bitcoin’s high correlation and beta to “risk-on” assets many times. In today’s piece, we’re taking a deeper look into those risk-on correlations, and comparing the returns and correlations across bitcoin and other asset classes.

The many people who envision Bitcoin playing a more significant economic role in the future typically ignore these short-term relationships. However, these correlations have proven to be some of the most important drivers of bitcoin’s exchange rate, especially over the past few years.

Consistently, tracking and analyzing these correlations can give us a better understanding if and when bitcoin has a real decoupling moment from its current trend. We don’t believe we are in that period today, but expect that decoupling to be more likely over the next five years.

Macro Drives Correlations

For starters, we’re looking at the correlations of 1-day returns for bitcoin and many other assets. Ultimately we want to know how bitcoin moves relative to other major asset classes. There’s a lot of narratives on what bitcoin is and what it could be, but that’s different from how the market trades it.

Correlations range from -1 to 1 and indicate how strong of a relationship there is between two variables, or asset returns in our case. Typically, a strong correlation is above 0.75 and a moderate correlation is above 0.5. Higher correlations show that assets are moving in the same direction with the opposite being true for negative or inverse correlations. Correlations of 0 indicate a neutral position or no real relationship. Looking at longer windows of time gives a better indication on the strength of relationship because this removes short-term, volatile changes.

What’s been the most watched correlation with bitcoin over the last two years is its correlation with “risk-on” assets. Comparing bitcoin to traditional asset classes and indexes over the last year or 252 trading days, bitcoin is most correlated with many benchmarks of risk: S&P 500 Index, Russel 2000 (small cap stocks), QQQ ETF, HYG High Yield Corporate Bond ETF and the FANG Index (high-growth tech). In fact, many of these indexes have a strong correlation to each other and goes to show just how strongly correlated all assets are in this current macroeconomic regime.

As Jurrien Timmer highlights, the entire market over the last year has been positively correlated (in red) with few places to hide (in blue).

Source: Jurrien Timmer, Fidelity

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The tables below compare bitcoin to some key asset-class benchmarks across high beta, equities, oil and bonds.

Note: you can find any of these indexes/assets on Google Finance with the tickers above. For 60/40, we’re using BIGPX Blackrock 60/40 Target Allocation Fund, GSG is the S&P GSCI Commodity ETF, and BSV is the Vanguard Short-Term Bond Index Fund ETF.

The rest of this article is open to paying members only. Here’s what’s behind the paywall 🔏:

Bitcoin’s more recent correlations to these assets. 👀
A different look at how bitcoin relates to risk-on. 🔎
How this dynamic might change over the next decade. 🔟

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