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BTC as a source of diversification
Cryptocurrencies have historically had low correlation with traditional asset classes, creating a unique source of idiosyncratic risk for portfolios.
Bitcoin is known for its extreme volatility, with wild price swings like a roller coaster, dropping over 64% in 2022 and rising 160% in 2023. This volatility can be difficult for crypto traders.
The S&P 500, on the other hand, offers a more stable performance, with an average annual return of 9% to 10%, and serves as a benchmark for the U.S. economy. Despite lower returns compared to Bitcoin, the S&P 500’s consistency and reliability make it a preferred choice for risk-averse investors looking for predictable investment results.
According to Glassnode, an allocation to cryptocurrencies can diversify risk and boost returns on traditional portfolios.
For example, a small allocation to the Coinbase Core Index (COINCORE), a market cap-weighted cryptocurrency index comprised primarily of Bitcoin (70.9%) and Ether (21.9%), in a 60/40 portfolio (MSCI ACWI 60%) , MSCI ACWI 40%). % US Agg) grew both its absolute and risk-adjusted returns over the five-year period ending March 31, 2024.
Strong performance in the first quarter
In the first quarter of 2024, the market capitalization of cryptocurrencies, including BTC, ETH, altcoins, and stablecoins, increased by 63%. This was driven by the rise in major cryptocurrencies such as BTC and ETH, as well as an increase in stablecoin issuance.
Bitcoin (BTC) achieved impressive results in the first quarter of 2024, posting a 69% return and outperforming most traditional asset classes, according to a joint report from Coinbase and Glassnode.
Despite the launch of the BTC ETF, which many thought would lead to stronger correlations with traditional financial assets, using data from recent Glassnode and Coinbase Institutional reports, BTC has fallen behind major asset classes. The correlation was shown to be minimal. This suggests its potential as a valuable component for diversification within a portfolio.
BTC/S&P 500 correlation remains low
Bitcoin had a negative correlation with the DXY index and gold, but its correlation with the S&P 500 was low at 0.11. This suggests that Bitcoin price movements are largely independent of traditional markets.
However, at the start of Q2, BTC is down 15% from its high, which coincides with the DXY index rising above 106, indicating a negative correlation between the two. is further emphasized.
The second quarter report also points out that Bitcoin’s volatility has decreased since January 2020, with peaks becoming less noticeable. Volatility currently sits at just under 60%, but the report highlights a long-term downward trajectory, despite occasional spikes above the trend line, primarily from 2020 to 2021.
As Bitcoin continues to mature into a major asset class, its volatility is expected to continue to decline over time.
Why is the stock market important?
Historically, the correlation between Bitcoin and the stock market has been low, but it has increased slightly in recent years, with the correlation rising to 0.41 over the past five years.
according to Tasty Live Research shows that there is generally little correlation between Bitcoin and the S&P 500, except during times of significant price movements for Bitcoin (upside of +5% or more or downside of less than -5%).
If Bitcoin price fluctuation exceeds 5%:
- Average volatility of the S&P 500: 0.42%.
- Median change in S&P 500: 0.19%.
- Standard deviation: 1.53%.
If Bitcoin price fluctuation is less than -5%:
- Average volatility of the S&P 500: -0.67%.
- Median change in S&P 500: -0.34%.
- Standard deviation: 2.31%.
Other days:
- Average volatility of the S&P 500: 0.09%.
- Median change in S&P 500: 0.11%.
- Standard deviation: 1.11%.
The increasing correlation between Bitcoin and the S&P 500 can be attributed to factors such as falling inflation and the Federal Reserve’s decision to halt interest rate hikes.
This created a favorable environment for risk-on trading and led to a bullish rally in both Bitcoin and the S&P 500 index despite the post-correction bearish tone in 2022.
Bitcoin’s increasing correlation with traditional stock markets such as the S&P 500 and Nasdaq, while decreasing its correlation with gold, means that Bitcoin is behaving more like a risk-on asset than a safe-haven asset. It suggests that there is.
When investors feel adventurous, they often gravitate toward stocks and digital coins for higher profit potential.
Increased involvement of institutional and retail investors in both stock and cryptocurrency markets may lead to simultaneous buy and sell decisions and coincident price movements of these assets.
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