Bitcoin Uncorrelated – An examination

Bitcoin has been heralded as many things: Hard Money, Digital Gold, Uncensorable Banking, and Electronic Cash. As the technology powering blockchain becomes more understood and widespread, Bitcoin has also taken on the label of an “Uncorrelated Asset.” This means that it does not follow, or trade with any other publicly available stock or ETF. Bitcoin has also taken on the label of an “Uncorrelated Asset.”

While this has been a common rallying call for Bitcoin enthusiasts, a deeper look is necessary before proclaiming it uncorrelated or a financial “safe haven.” Here we will examine several narratives supporting both sides of the argument.

Iran

The recent news from Iran has been a test case for how Bitcoin is traded during international unrest. The last week showed a look at the global trading mentality. The price jumped from $6900 – $8500 over a matter of days. The initial pump corresponded with the report of Qassem Soleimani’s death by US drone strikes on January 2nd.

The price rose more as Iran retaliated against a base located in Iraq, though no US casualties were reported. Bitcoin’s price seemed ready to continue rising and only dipped as President Trump announced that no further military action would occur. It continued to drop to $7,800 the following day.

Correlated

Mainstream analysts like Tom Lee of Fundstrat offer a different opinion. Tom is on record stating that Bitcoin does better when the S&P is up over 15%. A rising tide raises all ships, and the reason for this could be as simple as money entering the financial market as investors feel more comfortable acquiring more speculative assets.

The correlation seems to have weight, as the S&P is up over 30% since 2019 and Bitcoin is up over 100%. 2018 saw both declines on both charts, 9% for the S&P and 80% for Bitcoin.

Uncorrelated

Conversely, CNBC is quick to point out that Bitcoin is up during times when stocks trend lower. In this example from May of 2018, Bitcoin rose to nearly $8,000 as the stock market retracted 694 points on concerns over the trade war with China. Specifically, China instituting $60 billion on imported US goods.

Shortly after, gold dropped more than 10% in a rare move of stocks and gold trading together. This would lend credence to the argument for Bitcoin being uncorrelated to the prices of other markets.

Digital Gold

Traditionally, times of turmoil result in better prices for bonds and precious metals, as investors turn to lower volatility assets that retain value. Bitcoin’s volatility has kept it firmly out of this category as well. Speaking to Market Insider, Craig Erlam, senior market analyst at Oanda of London stated: “There’s a desperation among crypto fans for bitcoin to become the new gold, but these people ignore all the times that it moves inversely with sentiment . . . At the moment, it’s a toy that has the potential to be more, but that’s all.” Based on this, it is difficult to categorize Bitcoin as a “store of value.”

Gold bug and chief strategic of Euro Pacific Capital Inc., Peter Schiff, has been an outspoken critic of Bitcoin for years. He points out that Bitcoin dropped in price at the and of 2019 as stocks and gold rose.

In this example, Bitcoin acting as an uncorrelated asset is not necessarily a good thing. However, the recent January pump to $8,000 dampens this assertion a bit.

Bitcoin Hash Rate

The Bitcoin hash rate, or the amount of computing power and electricity used to run Bitcoin, has been steadily climbing for the past three years. To be competitive, mining operations are required to run enough specialty computing equipment to fill entire warehouses that require massive amounts of power. Due to the high cost of entry and ongoing costs, it would stand to reason that more miners would invest their money if the Bitcoin price continued to rise.

Instead what we see from this graph is more mining power being directed towards Bitcoin with little deference to the actual price. The last sustained dip in hashing power occurred in November of 2018 when the price plummeted from $6,600 to $3,300.

All hype – No payoff

In its desperation to attach a narrative to price action, social media sites like Twitter and Reddit are always looking for the next indicator to predict Bitcoin’s next move. Before the price rebound in 2019, numerous websites tried and failed, to determine the timing for the next pump.

The bull market of 2017 led many to believe the trend would continue in 2018 and 2019. The issue with this bullish “hopium” speculation is it has led an untold number of would-be investors to financial distress.

Many of these analysts were silenced as the price plunged from $19,000 to $3,500.  Along the way, multiple events were hypothesized to bring a return to higher prices. Some of the most popular were:

Chinese New Year – People would use their “Red Envelope” money to buy Bitcoin.

Consensus Pump – The Consensus Conference would bring announcements of new development or partnerships, attracting new buyers.

Stock Market Bonuses – New York stockbrokers would use their bonuses to buy Bitcoin.

Tax Returns – The same thing, but with normal citizens and tax returns.

Bakkt Launch – The Bakkt exchange would allow large institutions and pensions to buy up Bitcoin.

Fidelity Digital – Same as Bakkt, only more public.

Perhaps the most interesting recent correlation is the idea that Bitcoin and avocados shared the same price chart. While they did seem to trade together momentarily, the probable explanation is that the same kind of investors who can spend money on avocados are comfortable on riskier assets. 

These correlations and data points are all very interesting and deserve their own in-depth articles in the future. But we still need to answer the question: “Is Bitcoin an uncorrelated asset? The answer seems to be “Sometimes it is, sometimes it is not.” 

Feature by FomoHunt.

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