Bitcoin has so far outperformed traditional asset and indices, but the correlation with equity markets grew in Q1 of 2020, says CoinMarketCap’s recent analysis.
According to a publication of CoinMarketCap on Monday, November 2nd, Bitcoin correlation with traditional assets like Gold and Silver grew throughout 2020 and started to break off in October as the crypto market switched its focus from DeFi altcoins to Bitcoin.
Over the past few weeks, Bitcoin’s price has reached heights not seen in years. As Crypto Economy reported, on October 8, Square $50 million worth of BTC as part of their investment strategy. This announcement seemed to fuel a surge in Bitcoin’s price from around $10,500 to quickly surpass various resistance levels. On October 21st, PayPal’s announcement of supporting Bitcoin and other cryptocurrencies further propelled Bitcoin prices higher. With large corporations “investing and adopting Bitcoin and other cryptocurrencies, the market has switched its focus from DeFi altcoins to Bitcoin.”
These events caused Bitcoin correlation with commodities to eventually break off in October. CoinMarketCap said:
“Bitcoin’s correlation with commodities increased throughout the year and started to break off in October — the increase could potentially be explained by investors’ risk-aversion towards traditional markets given the uncertainties from COVID situations and overall political environments.”
Furthermore, Bitcoin showed a significant correlation with equity markets in Q1 of 2020. This was because “all markets sold off when there was a flight to liquidity” during the COVID pandemic. When governments announced financial stimulus packages, prices for BTC, commodities, and equities recovered rapidly, again resulting in a “significant correlation of these asset classes, which made people brand BTC as a risk-asset, like equities, when there was a flight to liquidity.”
According to CoinMarketCap, the $1,200 stimulus package is positively Bitcoin as an alternative investment solution to hedge against potential inflation. Brian Armstrong, CEO of Coinbase, in April, when stimulus was distributed, revealed that most of the deposits were the same size as the $1,200 stimulus check. This means that instead of spending stimulus money, people were investing in Bitcoin.
This scenario also explains Bitcoin’s negative correlation with the U.S. Dollar Index (DXY). According to the analysis by CoinMarketCap, “ Bitcoin’s correlation with the U.S. Dollar Index (DXY) started to drop and became negative starting in mid-late April 2020,” as US Dollar became weaker, while a portion of the stimulus went to Bitcoin and the cryptocurrency market.
The analysis concludes that Bitcoin’s correlation with traditional assets will break off further and Bitcoin would serve as an alternative solution that offers investors diversification opportunities.
