Bitcoin has low correlation with traditional assets and is becoming a new asset class favored by institutions


Investors have a new option to increase their investment portfolio. Bitcoin has finally become a new asset class, and its existence has broken the perception of many traditional investors on the financial markets that we know well.

In 2016 and 2017, Bitcoin’s parabolic price surge was mainly driven by retail investors. This year, it seems that institutions have the upper hand. Although retail investors are cautious about buying large amounts of cryptocurrency because they still remember the losses they suffered in 2018 and 2019, institutional investors have adopted sound risk management procedures to protect themselves from shrinking funds Impact. Most importantly, even if the proportion of investment from companies is low, it makes sense in a relatively young and illiquid market relative to stocks, bonds, and commodities.

Now, more and more companies publicly announce the addition of Bitcoin to their reserve assets, which will mean that it is difficult to put the “elves” back into the “bottle”.

Why relevance has an impact

The investment judgments of retail investors are mainly based on sentiment, price trends and news. The decision-making process of institutional investors is more complicated and is carried out on advanced models, which usually consider the correlation between the assets contained in the portfolio. Risk management is the key to the long-term survival of professional investment entities . The best way to assess risk is to start by determining the relationship that connects different assets statistically.

Portfolio managers reduce overall risk by holding assets that are as “unrelated” as possible to each other . When the trends of different assets are inconsistent, it will significantly reduce the volatility of the total investment portfolio, because statistically speaking, the profits of one asset can make up for the losses of other assets.

This is the first time that happened during the market crash related to COVID-19 in March 2020. For many years, the correlation between Bitcoin and other traditional risk assets has been very low, but as the correlation suddenly rises, Bitcoin and stocks fall together.

New players in the game

Interestingly, the main driver of the collapse of the crypto market may be the reaction of short-term investors and speculators . From the number of open leveraged positions on Bitfinex , we can see that short sellers have increased their risk exposure at a record rate, while buyers have to close their positions due to sudden margin calls and liquidation. We can assume that at least some of these short-term traders also invest in stocks and stock derivatives, so their trading must be adjusted accordingly.

From March to June, the price performance of Bitcoin, Facebook, Google and Apple (relatively speaking) almost completely overlapped.

This is historic because this is the first time Bitcoin and cryptocurrencies have been affected by macro events. As Bitcoin becomes a new asset class, market infrastructure and market participants will always have more obvious overlaps with traditional markets.

This tweet by Peter Brandt on March 12 captures the relevance of the panic selling.

However, on another level, some things are brewing and are gradually reflected in the strong V-shaped recovery, which brings Bitcoin one step closer to historical highs.

Since March of this year, Grayscale Bitcoin Trust has attracted funds at increasingly higher interest rates and currently holds 500,000 Bitcoins. It is worth mentioning that the target customers of the fund are institutional investors and accredited investors who are willing to pay a much higher premium than the spot price of Bitcoin in order to add a regulated investment tool to their portfolio so that they can access To the crypto market .

At present, GBTC is the largest single investment pool in the Bitcoin field, but at the same time, other large private entities and companies are also hoarding Bitcoin as a reserve asset. They may not be as price sensitive as the average crypto investor who focuses on short-term speculation. These companies invest after long-term due diligence and are fully aware of the risks involved. They may use risk management tools to reduce this risk, as this is a common practice for institutional investors.

JP Morgan data seems to confirm Bitcoin’s new status as a new asset class among institutional investors. Since the second half of 2020, the rate of capital inflows into gold ETFs has slowed along with the increase in GBTC Trust holdings-this is unlikely to be a coincidence.

Brand new game

Participants in the new and old markets have different views on the market, reflecting both short-term fluctuations and driving macro trends, depending on which one is the dominant force that day.

As mentioned earlier, the correlation between Bitcoin and stocks has historically been very low. When comparing it with gold, the same situation will arise.

There is a reason for this: Bitcoin operates according to its own rules.

Bitcoin is a unique new asset class in the financial sector. Bitcoin has nothing to do with the economic cycle. Bitcoin introduces indicators such as halving and computing power, which affect the value/price of Bitcoin, but have nothing to do with any financial model developed so far.

To some extent, traditional currencies have the same characteristics from an investment perspective. News, data and indicators affect currencies every day. The reasons for their fluctuations are always different. These components usually balance each other, resulting in relatively low volatility and correlation with other asset classes.

Investors tend to avoid assets that are full of uncertainty in favor of assets that are more predictable. The irony is that unexpected fluctuations in monetary policy are the main reason for currency price fluctuations. Bitcoin has a mathematically planned monetary policy. What could be more predictable than this?

Strategic opportunity

Traditional currencies with the lowest volatility are those assets that investors more often add to their long-term investment portfolios. However, derivatives of EUR/USD, GBP/USD or JPY/USD are traded in large numbers around the clock by traders every day.

Due to the rapid development of derivatives infrastructure, Bitcoin is expected to join the most liquid foreign exchange trading pair. The market is adapting to the needs of more pressing participants. The days of big players manipulating prices on less transparent exchanges may be over.

New, larger traders are entering the market. The growing interest of institutional investors in Bitcoin is not only reflected in the long-term portfolio allocation, but also large investors from traditional markets are gradually coming into contact with the crypto field.

In terms of open positions, the Chicago Mercantile Exchange has risen to the second highest position in recent months. Bitcoin’s higher volatility is a huge opportunity; traders of all backgrounds will be willing to take advantage.

It is worth noting that the Chicago Mercantile Exchange (CME) traders share their liquidity in derivatives of different asset classes, which may strengthen the relationship between Bitcoin and traditional assets when a margin call is received during market adjustments. The correlation between.

The piano player was warned again.


As Bitcoin becomes a new asset class, more investors will recognize its value-added in a diversified investment portfolio. The low long-term correlation with other existing assets represents a unique risk/return form of investment decision.

New investment tools will emerge, making it easier for large institutions to accumulate Bitcoin. It feels that those companies that have chosen to include cryptocurrencies in their reserves are in a similar position to the retail companies that adopted cryptocurrencies in early 2015.

At the same time, increasing liquidity, improved market structure, and greater transparency will attract new speculators, who so far have only been on the scene looking at the parabolic rise of bitcoin prices. This will spawn a positive feedback loop and will only strengthen Bitcoin’s position as a new asset class . In turn, every market participant needs to include occasional correlations with traditional assets in its model.

If millennials used their $1,200 stimulus check to buy low-interest-rate investments in March, large companies might support their prices during the next crash to increase their reserves. It is easy to understand how the scale of related dynamics changes, and the impact on Bitcoin is significant.

The connection between Bitcoin, stocks, commodities and foreign exchange will become increasingly close, and investment platforms such as Coinrule will allow multi-asset exposure, adding unprecedented value to their users.

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