Bitcoin's price does not move completely independently from other assets. Its correlations with certain stocks, precious metals, and funds can provide insight for investors on market moves. But these relationships fluctuate and should not be used as a crystal ball.
New reports find that Bitcoin's correlations vary across different timeframes. Short-term correlations are generally weaker than long-term ones. During extreme market events, like COVID-19, Bitcoin's correlation to risk assets tends to increase.
crypto-stocks-mirror-bitcoins-volatility">Crypto Stocks Mirror Bitcoin's Volatility
Some of the highest correlations for Bitcoin are with stocks tied to crypto companies. Over the past year, MicroStrategy (MSTR), Coinbase (COIN), and Riot Blockchain (RIOT) have all stayed strongly correlated with BTC's price movements.
Their 90-day correlation coefficients consistently register above 0.75. MSTR has fallen no lower than 0.68 since last September. Meanwhile, COIN briefly disconnected from BTC this summer during heightened volatility.
These stocks frequently outperform Bitcoin itself while showing even greater volatility. Investors likely treat them as proxies for direct BTC exposure.
Their large Bitcoin holdings explain the tight correlations. MSTR holds the most of any public company at 152,333 BTC. COIN places 4th with 10,766 BTC. RIOT comes in 8th with 7,094 BTC.
Silver Outpaces Gold in Mimicking Bitcoin
When analyzing commodity correlations, silver has moved more in sync with Bitcoin than gold since 2019. Their correlation coefficient reached 0.26 over the past three years. Gold sat at just 0.15 during the same period.
As a highly volatile precious metal, silver may simply react faster to market shifts detected by Bitcoin first. The "digital gold" narrative does not guarantee a strong factual correlation.
Growth Funds More Aligned Than Value Funds
Looking at equities broadly, growth funds tend to correlate more closely with crypto than value funds. Small-cap growth funds registered a 0.41 correlation coefficient against Bitcoin. Small-cap value funds came in lower at 0.35.
This likely results from the higher risk tolerance of growth investors who are more willing to speculate. Value investors focus on fundamentals over speculation.
Meanwhile, bond funds show little to no correlation with Bitcoin at all. Passive bond funds correlated at just 0.11, while active ones were barely higher at 0.13.
Use Correlations Cautiously
With Bitcoin's extreme historical price volatility, no correlations hold firm for long. But analyzing these relationships across recent timeframes still provides valuable context on how broader markets interact.
Rather than trying to predict prices, investors should use correlations to better understand macro market dynamics. Bitcoin offers a window into bigger movements from stocks, commodities, and funds.
How Can Bitcoin Correlations Inform Investment Decisions?
Bitcoin's varying correlations may seem fickle or unreliable. But understanding them still holds practical value for investors building balanced portfolios.
Viewing Bitcoin as an uncorrelated asset would be a mistake. It clearly reacts to moves from certain stocks and precious metals. But the exact degree of correlation fluctuates constantly.
Nonetheless, monitoring these price relationships helps gauge market sentiment and risk. When correlations strengthen unexpectedly, it signals potential volatility across sectors.
Manage Risk Through Diversification
Savvy investors limit risk through diversification. Bitcoin and crypto stocks substantially outperformed most other assets over the past decade. Holding both helps balance against underperformance from one or the other.
Adding precious metals like silver also builds protection from stock downturns. Bonds remain important for managing overall risk during times of volatility.
But overdiversifying into too many assets inflates fees and reduces returns. Finding the right balance requires regularly analyzing correlations between holdings.
Aim For Non-Correlated Assets
Ideally, a portfolio should combine assets with low correlations. This way, if one falls, another may rise to offset it. But completely non-correlated assets are rare.
Gold remains the classical hedge with limited links to stocks. Real estate also moves independently from other holdings. Some active investment managers may have skills for finding diamonds in the rough.
Bitcoin's developing correlations show it does not fully diversify a portfolio alone. But in moderation, it offers unique growth potential compared to stocks and bonds.
The Future of Bitcoin Correlations
Attempting to predict Bitcoin's future correlations may seem futile given their variability to date. But as cryptocurrencies mature, some patterns are starting to emerge.
If history is any guide, Bitcoin's relationships can strengthen during times of economic unrest or instability. This was evidenced during 2020's coronavirus crash.
But in periods of steady growth, Bitcoin begins to decouple and act more like its own asset class. This was observed in 2021 when crypto valuations ballooned while stocks marked time.
Mainstream Adoption Damps Volatility
As more mainstream investors and institutions buy Bitcoin, its legendary volatility should continue decreasing. With less violent price swings, correlations may also start to stabilize.
In a more mature state, returns may begin resembling bonds and stocks rather than silver or tech stocks. But mainstream acceptance requires major improvements in security and regulation first.
Government oversight seems inevitable since nobody controls Bitcoin. But future regulations aimed at investor protection could ironically provide the foundations for that mainstream adoption.
Bitcoin Correlations Remain Unique
Even if Bitcoin correlations solidify, they will likely remain fairly distinct from other assets. Unlike stocks and commodities, Bitcoin was engineered specifically to avoid centralized control over supply.
These groundbreaking properties will continue setting it apart as a decentralized store of value differing from corporate stocks backed by businesses.
While its correlations are worth tracking, Bitcoin is ultimately an asset unlike any other in history. It represents the emergence of digital scarcity and a new paradigm for money. So in some ways, Bitcoin's correlations with outside markets may gradually become less relevant.
In conclusion, examining Bitcoin's historical correlations provides helpful perspective, but they are no crystal ball. There are reasonable theories on how increased adoption could damp volatility and normalize correlations. But Bitcoin represents such a unique asset that reliably predicting its correlations is nearly impossible.
As with any investment, moderation is key. Considering Bitcoin's correlations allows better risk management through proper portfolio diversification. But obsessing over correlations risks missing out on Bitcoin's game-changing premise and huge potential as a still-nascent digital asset. Bitcoin's ultimate path remains highly unpredictable and will likely continue surprising investors and analysts over its next decade.