Up until now, bitcoin has largely been behaving as an uncorrelated asset. This got a lot of people excited, categorizing bitcoin as a future digital gold or a safe haven asset. The worst thing about this recent dip in price ($5,873, GDAX) was not the decrease in the price itself. Much more daunting for bitcoin, was that the price dip coincided with the dip of the US stock market.
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Bitcoin and the Bear Market
This chart shows the Dow Jones Industrial Average overlaying the bitcoin price (red line). A large part of bitcoin’s value proposition to institutional investors is that bitcoin potentially carries low or negative beta. That’s finance speak for an asset having low or an inverse correlation with the market as a whole (e.g. the S&P 500).
Asset managers like assets with low or negative beta. Asset managers’ performance is constantly being measured against the stock market indices. If the assets they manage are correlated, it’s hard for them to outperform the market. That’s why it’s very important for bitcoin to not dip when the stock market does. But it did.
In December, I wrote the following:
“The perception of bitcoin as an uncorrelated asset may be the most important driver in why Wall Street wants to get in to bitcoin, but ironically, the very fact that Wall Street hasn’t gotten in yet may simultaneously be a key factor in why bitcoin still is an uncorrelated asset in the first place.”
Now let’s plot the beta (in purple) for the time period before and after bitcoin futures trading began on the CME & Cboe.
A beta of 1 means that the asset moves with the market. A beta between 0 and 1 means that the asset moves with the market, but dampened. A beta above 1 means that the asset moves with the market, but amplified. A beta of 0 means that the asset doesn’t move with