The correlation between Bitcoin (BTC), gold and the stock market is down sharply
As bitcoin (BTC) crosses the $ 50,000 mark, its correlation with gold and stocks declines.
Portfolios with weakly correlated assets are more diversified.
Investors are studying the potential of BTC and Ethereum (ETH) to improve adjusted returns.
As bitcoin (BTC) crosses the $ 50,000 mark , its correlation with gold and stocks continues to decline, according to a Bloomberg analysis .
This divergence from Bitcoin supports arguments in favor of portfolio diversification including cryptocurrencies.
Low correlation with Bitcoin: more diversification?
According to the analysis, the 90-day correlation between BTC and the S&P 500 index of the US stock exchange recently fell from 0.5 in October to 0.21.
The higher the correlation between securities, the more similar their performance. Thus, portfolios with weakly correlated assets are more diversified. According to a report by investment research firm Morning Star, these diversified portfolios are known as “allocation funds” combining stocks, treasury bonds, and other investments.
One of the reasons amateur investors have earned a higher return, as Morningstar says, is:
“Due to their diversified approach, allocation funds tend to have more stable performance and are easier to hold than funds which are subject to larger fluctuations in performance”.
Investors change strategy
Bloomberg spoke with Benson Durham, head of quantitative global policy analysis at Cornerstone Macro LLC, a brokerage firm. He stated :
“In terms of Bitcoin, as well as other digital coins, compared to other traditional risky asset classes, the benefits of diversification remain intact.”
Last year, he and his colleague Roberto Perli suggested adding cryptocurrencies to an all-equity portfolio to reduce potential volatility. Institutional investors have been wary of BTC due to its instability. However, they are currently investigating its potential, which could generate adjusted returns.
According to Durham, acquiring cryptocurrencies such as ethereum (ETH) helps solidify this argument as the average correlation between cryptocurrencies is declining. Diversifying digital assets “also makes sense,” he said.
However, despite the recent BTC craze, Durham warns that “there may be no huts” if cryptocurrencies plunge.
Previous correlation
In May 2020, BeInCrypto reported that BTC’s correlation with the S&P 500 was more pronounced following a rise in the latter. The other extremity turns out to be the correlation of BTC with gold, where the price movements were larger.