Bitcoin’s Correlations With Global Financial Assets Soar Amid Coronavirus Crisis


Many investors hold Bitcoin (BTC) as a hedge against the global financial system. However, as the numbers show, Bitcoin was not spared by the recent COVID-19 financial crisis.

This article will analyze the movement of global financial markets and its correlation with Bitcoin during the COVID-19 crisis. We will consider the following sources as price measures for the following items.

The recent crash has really challenged Bitcoin’s claim as ‘digital gold’ and is testing its claim as a financial ‘safe haven’.

Related: Is Bitcoin a Store of Value? Experts on BTC as digital gold

A 21-day sliding correlation chart shows that Bitcoin has recently become increasingly correlated with other global financial assets.

This statistic should be worrisome for cryptocurrency investors trying to find respite amid all the financial chaos.

Is gold doing better?

Before giving “digital gold” a hard time, note that physical gold has not protected investors from this financial storm either.

Correlations between gold and other financial assets have also skyrocketed during this time, signaling that global financial markets are more interconnected than ever.

The importance of a weak or negative correlation

Harry Markowitz, the father of modern portfolio theory, postulated that the most important aspect of risk to consider is an asset’s contribution to the overall risk of the portfolio, rather than the risk of the asset in isolation.

Therefore, a portfolio is not more risky if it contains Bitcoin, which is a more volatile asset, and if it is not correlated or negatively correlated with the other holdings in the portfolio.

Uncorrelated assets are the envy of portfolio managers because they can reduce volatility and improve risk-adjusted returns. Many portfolio managers keep Bitcoin as an alternative asset in their portfolio for this reason alone.

If Bitcoin does not remain uncorrelated with the rest of the financial market, then it can be seen as a significantly less desirable risky asset by asset managers and the institutional market. A decrease in institutional interest could mean massive sales and less fiat inflows into the market.

For the moment this is not the case

Despite a recent increase in its correlation, a portfolio made up of 80% stocks and 20% Bitcoin would have outperformed a 100% equity portfolio in terms of risk-adjusted return over the past three months and also over the past year.

However, if we only looked at last month, Bitcoin would have been better avoided.

It is true that Bitcoin has remained a relatively detached and uncorrelated asset in times of economic prosperity. But it’s not enough. In order for it to be considered a true financial safe haven, it must be resistant to shocks affecting other financial markets. Especially in times of turmoil, the performance of the asset should be subject to careful scrutiny.

Hope for a rally

Nonetheless, Bitcoin’s recent price rally has shown signs of promise. This can give cryptocurrency holders hope, especially if other assets continue to accumulate.

Do cryptocurrency indices offer better diversification?

The HODL30 index, a portfolio comprising the top 30 cryptocurrencies by market cap, was less correlated to the overall financial market than Bitcoin. The correlation between the index and US stocks was significantly lower than the correlation between Bitcoin and US stocks.

If cryptocurrency investors want to hedge against fluctuations in the global market, indices can become increasingly relevant.

Time will tell if Bitcoin or any other cryptocurrency will meet the high expectations of investors as a financial safe haven. In a tightly linked and interconnected financial system, such a thing may not be possible.

Perhaps eliminating finicky cryptocurrency investors in times of crisis will only leave strong and robust future volatility. Or, this collapse in prices will set a precedent for investors to look for money whenever the next financial crisis is brewing, because Bitcoin can no longer be trusted to protect them.

The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Anthony Xie is the founder of HodlBot, a trading tool that allows cryptocurrency investors to automate their trading strategies.


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