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The Importance Of Correlations In Crypto Investments

Bitcoin

Correlations are a widely-used factor when it comes to investing in Bitcoin and related assets as they help with assessing the potential of the market. There are two main arguments when it comes to Bitcoin correlations: first, how much is it correlated to equities, and second, how well does it correlate with other types of investments?

How much is Bitcoin correlated to equities and what does that mean?

During Bitcoin’s lifespan, it exhibited a negative correlation to the broader market. This led to speculations that it was a type of inflation hedge or portfolio diversifier. Over the years, however, the correlation between equities and Bitcoin has started to increase, causing investors to question if the pairing is a long-term or short-term trend.

One of the main factors when it comes to assessing the potential of the market is the correlation between asset classes. For instance, during times of uncertainty and volatility, the correlation between asset classes has increased. On the other hand, it could be that the maturity of the cryptocurrency market is contributing to the increase in the correlation between different types of investments.

The rapid emergence and evolution of cryptocurrencies have led to the rapid emergence and evolution of mainstream investing. One of the most prominent initial public offerings (IPOs) of this type was that of Coinbase in April 2021. Six months later, in October 2021, the first Bitcoin ETF launched in the US.

Due to the increasing number of regulatory agencies and financial institutions supporting the use of cryptocurrencies, it is difficult to predict how the market will behave in the future. However, given the market’s maturity, it is possible that the correlation between Bitcoin and the broader market will eventually decrease.

Although the correlation between equities and Bitcoin has started to increase, it is still not a negative factor when it comes to investing in the market. For many investors, the rising prices of Bitcoin have become a good entry point into the cryptocurrency market. With Bitcoin prices hovering around $20,000, it is still possible to add to or establish a larger tech allocation.

What are the correlations between indirect crypto investments and Bitcoin?

One of the most common ways to invest in Bitcoin is through an exchange-traded fund (ETF). This type of product allows investors to have exposure to different sectors or companies in the cryptocurrency market. One of the most popular Bitcoin futures-based exchange-traded funds is the ProShares Bitcoin Strategy.

The VanEck Vectors Bitcoin ETF is currently trading at around 0.98, and it has a perfect correlation with Bitcoin. The difference between the two is due to the roll costs, which result in a small drag over time. For the year-to-date (YTD), the ETF has lost over 55.3%, while Bitcoin has fallen over 54.4%. Another asset that is similar to the VanEck Vectors Bitcoin ETF is the Grayscale Bitcoin Trust. Although the price of the trust varies from Bitcoin, it’s discount and premium mechanism make it an attractive alternative investment.

The Bottom Line

Despite the high correlation between Bitcoin and the broader market, it is difficult to predict how the market will behave in the future due to the short historical dataset and the uncertainty surrounding the global economy. However, higher correlations are not necessarily a negative factor when it comes to investing in the market. For instance, investors who are using Bitcoin as part of their tech allocation may benefit from higher correlations. Factoring this into your investment approach is the right way to adopt the best strategy in a crypto bear market.

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