This article analyses the movement of global financial markets during the COVID-19 crisis and their connexion with Bitcoin. For the following, we will find the following sources to be price measures.
- Bitcoin’s price from CoinMarketCap.
- Bond prices from Vanguard Total Bond Market Index.
- Stock prices from the S&P 500.
- Gold from the price of gold futures traded on COMEX.
- Real Estate from the Dow Jones U.S. Real Estate Index.
- Oil as the price of crude oil futures from Oilprice.
The recent crash has questioned the argument of Bitcoin as “digital gold” and brings its statement to the test as a “haven” of finance.
A 21-day rolling correlation graph shows Bitcoin has been significantly associated with other global financial assets in recent years.
For cryptocurrency investors hoping to find a respite amid all the financial uncertainty, this figure will be alarming.
Has gold fared any better?
Before we give such a hard time to “digital gold,” we should remember that physical gold has not shielded investors from the financial storm either.
During this time even the correlations between gold and other financial assets have risen, signaling that the financial markets of the world are more interconnected than ever.
The importance of low, or negative, correlation
Harry Markowitz, the founder of modern portfolio theory, postulated that the most significant part of the risk to be weighed is the contribution of an asset to the portfolio’s overall risk, rather than the risk of the isolated asset.
A portfolio is also not riskier if it includes Bitcoin, which is a more volatile currency, and is uncorrelated or negatively associated with the other portfolio assets.
Uncorrelated assets are portfolio managers ‘envy for being able to reduce uncertainty and increase risk-adjusted returns. Of that very reason, many fund managers hold Bitcoin alone as an alternative asset in their fund.
If Bitcoin isn’t uncorrelated with the rest of the financial system, then fund managers and the investment market may perceive it as a potentially less attractive, risky asset. Declining institutional interest could result in major sell-offs and fewer fiat market inflows.
So far, this is not the case
Following a recent upsurge in its correlation, a portfolio of 80% stocks and 20% Bitcoin would have outperformed a portfolio of 100% stocks from a risk-adjusted return perspective over the past three months and even over the past year.
However, if we were to just look at the last month, Bitcoin would have been better off avoided.
In times of economic growth Bitcoin has indeed remained a fairly isolated and uncorrelated asset. But that doesn’t suffice. It must be stable against shocks reverberating through other financial markets for it to be considered a true financial haven. The performance of the asset should be put under intense scrutiny especially in times of turmoil.
Hopeful for a rally
However, the latest price recovery by Bitcoin has shown signs of hope. This can offer cryptocurrency holders hope — especially if other assets keep tanking.
Do cryptocurrency indices provide better diversification?
The HODL30 index was less sensitive to the overall stock market than Bitcoin, a fund that included the top 30 cryptocurrencies by market cap. The index-to-American stock correlation was slightly smaller than the Bitcoin / U.S. stock correlation.
When investors in crypto-currency want to protect themselves from volatility in the global economy, indices can become more important.
Time can say whether Bitcoin or any cryptocurrency can live up to the high expectations of investors as a safe haven in terms of finance. Such a thing can prove impossible in a tightly kneeled, interconnected financial system.
Perhaps the culling of fickle cryptocurrency investors during a time of uncertainty would leave only the powerful and stable, dampening potential volatility. Alternatively, this price collapse will set a precedent for investors to scramble for cash once the next financial crisis brews because they can’t trust Bitcoin to protect them any longer.