Following our earlier article from this week, we received several questions surrounding the theme of whether bitcoin is actually a hedge to global and domestic calamity or whether its performance is simply correlated with the recovery of equities and other markets. This is a topic that we’ve explored often since the creation of the fund in mid 2018, as bitcoin’s ability to be an uncorrelated asset is fundamental to our thesis. Throughout the vast majority of bitcoin’s history, it’s maintained a 3-month rolling correlation in the range of 0.25 to -0.25 with the S&P 500 -- indicating that it is highly uncorrelated with equities.
With that historical backdrop in mind, bitcoin’s 3-month correlation reached its highest levels ever in mid-march, peaking at 0.62, indicating a moderate correlation. The Q1 2020 liquidity crisis is a clear outlier in the chart, evidence of fear quickly appearing in the marketplace. As discussed in our prior e-mail, correlations increase during liquidity crises like the kind experienced in February and March. Turning our attention to recent history, the S&P 500 and bitcoin weekly correlation (while a bit noisy) shows the period of heightened correlation during the liquidity crunch, followed by a rapid drop off in correlation immediately after -- evidence that inventors are treating asset classes individually, based on their own merits.
Taking a step back from time-based correlation analysis, we can evaluate the data in a visual manner in order to view cross-asset correlations over a certain period of time. In the charts below, a high correlation is computed as a 1 (dark red), negative correlation a -1 (dark blue), and no correlation a 0 (white). The chart below shows that Bitcoin (and other crypto-assets) have shown light to no correlation with any other asset classes year-to-date.
Further, bitcoin (and other crypto-assets) show little to no correlation to other asset classes following the liquidity crunch of 2020.
Not shown, but noteworthy is that over the past 8 years bitcoin has registered a .03 correlation (nearly 0) when compared to the S&P 500. Every single portfolio should have an allocation to bitcoin strictly from an efficient portfolio construction perspective. Additionally, we continue to believe that it will be the strongest performing asset of the next 12-18 months and new all-time highs are an inevitability given the macro backdrop.