Despite earlier concerns that Bitcoin’s price index tends to relate with other assets like the stock market or forex, recent study by Fidelity Digital Assets shows that Bitcoin has almost no relationship with these legacy assets. In a lengthy report titled Bitcoin Investment Thesis: Bitcoin’s Role As An Alternative Investment, the financial analysis company gave a detailed assessment of this finding and came to a rather surprising conclusion.
Bitcoin’s Historical Pattern of Correlation
Now cryptocurrencies especially Bitcoin have been blamed for being too unpredictable and volatile, even more so than regular asset trading like stock exchange, forex, commodities, etc. It is also assumed over the years that Bitcoin has had at least some connection with the stock markets because as recently as March 12-13, the sector tanked and shed a lot of its value and the same happened with the traditional markets like stock exchanges too. It also recovered quickly just like the markets themselves. Historically, the cryptocurrency’s proponents have desired that instead of this volatile area, Bitcoin be coupled with the likes of more stable safe havens like the bullion market with Gold. But, on closer inspection, this connection hasn’t been exactly proven over the years.
According to the report:
“Bitcoin’s correlation to other assets from January 2015 to September 2020 (displayed in the table below) is an average of 0.11, indicating there is almost no relationship between the returns of bitcoin and other assets.”
What does a Correlation of 0.11 Mean?
In analytical terms, the figure 0.11 is extremely low and shows little or no correlation between the two assets. Typically, the association is shown by this figure which is usually between 0 and 1 with 1 showing direct correlation or relationship. The number 0.11 is very low and shows that despite some correlation at odd points in history, the two asset classes have largely diverged over time.
However, the report does say that despite low association with other asset classes, it is pertinent to mention that it may develop such associations in the future:
“Bitcoin is a young asset that, until recently, was untethered to traditional markets…., as it is integrated in institutional portfolios, it could become increasingly correlated with other assets.”
Bitcoin has Better Rewarding Potential than other Assets
In addition to this groundbreaking finding, the report also showed that the cryptocurrency sector is much more rewarding for investors overall when compared to these other traditional instruments.
According to the report:
The report also highlighted the salient features of Bitcoin that made it a very desirable asset, especially in the long-term. It also mentions that the cryptocurrency is seen by different investors in a different light. Some believe it to be a safe haven, others like to day trade on it while still others think it is a swing trade option. This variety of opinions regarding Bitcoin is a plus and means that it will appeal to a much wider demographic overall.
Verdict
The report of Fidelity shows that Bitcoin is not like it seems when it comes to correlation. The existing viewpoint that the cryptocurrency is tied to conventional assets is being challenged with analytical tools. With this paradigm shift in perception, it is expected that Bitcoin will have a stronger image for the future, one that doesnt rely on validation from existing asset.
