Peering into Bitcoin/Equity Correlations | ETF trends
In financial market terms, bitcoin is not an old asset, but its history is still widely studied. One of the most important observations regarding the largest digital currency is that in its early years it was not closely linked to stocks.
There were even periods when bitcoin was negatively correlated to stocks. However, this scenario has changed in recent years, leaving bitcoin marked as a risk element in the process. As a result, it is not surprising that at a time when stocks are struggling, as is the case in 2022, the same is the case with bitcoin.
“First and most obviously, asset classes show increased correlation during times of market volatility and uncertainty. Even the bond market, which typically shows a negative correlation with stocks, has shown an increasing positive correlation through 2022. On the other hand, some of the correlation can be attributed to the maturity of the cryptocurrency market », noted Alerian analyst Roxanna Islam.
In fact, bitcoin’s rising correlations to stocks are disappointing some investors, especially in this high inflation environment. In the past, some experts believed that bitcoin would be an ideal anti-inflation tool. However, it is possible that the correlations to the digital asset will be disconnected in the future.
“With limited data and no precedent, it is difficult to say what Bitcoin correlations will look like in the future. It is likely that correlations may decouple slightly as markets normalize, but correlations may still remain high given market maturity,” Islam added. “However, higher correlation with stocks is not necessarily bad, especially since many investors have started using Bitcoin and Bitcoin-related stocks as a yield enhancer or as part of a larger technology allocation at levels around 1-5% of their total portfolio. .”
Speaking of correlations, investors can find stocks – so-called crypto-correlated stocks – that are highly sensitive to bitcoin’s price movements. These include bitcoin miners, firms that are major holders of bitcoin, and other fintech names with crypto exposure.
“Crypto miners also share high correlations with Bitcoin as they derive most of their profits based on the price of Bitcoin mined, but can vary based on how well they manage power costs and overheads. Correlations for exchanges and banks are still relatively high, but lower than other parts of the crypto ecosystem, as their profits also come from volumes, fees and commissions, Islam concluded.
Investors who wish to gain access to broad baskets of crypto-correlated shares can turn to exchange-traded funds such as Invesco Alerian Galaxy Crypto Economy ETF (SATO) and Invesco Alerian Galaxy Blockchain Users and Decentralized Commerce ETF (BLKC).
For more news, information and strategy, visit Crypto channel.
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The opinions and forecasts expressed herein are solely those of Tom Lydon and may not materialize. Information on this website should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any product.
