Disclaimer: This article is intended to convey more market information and does not constitute any investment advice. The article only represents the author's views and does not represent the official position of MarsBit.
Editor: Remember to follow
Source: Roxanna Islam
Original title: Crypto Logs: Two Questions on Correlation
In the current macro market turmoil, "correlation" is a factor that needs to be carefully considered. In fact, the two "correlation issues" that are discussed most frequently in the crypto industry are:
1, how much is the correlation between Bitcoin and US stock , and what does this correlation mean?
2. What is the correlation between indirect cryptocurrency investment and Bitcoin? Let’s analyze it together below
.
Question 1: How much is the correlation between Bitcoin and US stocks, and what does this correlation mean?
basically does not have much correlation with traditional US stocks during most of the life cycle of Bitcoin, and sometimes even shows negative correlation. Because of this, Bitcoin is usually regarded as a diversified investment portfolio or an inflation hedge against assets. However, in recent years, people have found that the correlation between Bitcoin and US stocks has been rising, and investors cannot determine whether this coupling between Bitcoin and US stocks is a short-term phenomenon or a long-term trend.
As of now, there are two mainstream interpretations of the correlation between Bitcoin and US stocks in the crypto market:
First, when market volatility and market direction are uncertain, seemingly unrelated asset classes will show a higher correlation. In fact, in addition to Bitcoin, even the bond market that is negatively related to the U.S. stock market has shown an increasingly higher positive correlation with the U.S. stock market throughout 2022.
Second, the correlation between Bitcoin and U.S. stocks may be attributed to the increasing maturity of the cryptocurrency market. Bitcoin has been around 15 years since its inception, but in the past few years, the penetration of cryptocurrencies into mainstream investment has accelerated.
Give a few examples: In April 2021, Coinbase (COIN) made its initial public offering; 6 months later, in October 2021, the first Bitcoin exchange-traded fund ProShares Bitcoin Strategy ETF (BITO), based on futures in the United States, was officially listed. In addition, institutional adoption continues to grow, and the U.S. Securities and Exchange Commission, the U.S. Securities and Exchange Commission, the U.S. Federal Reserve, and other financial regulators have also begun to take cryptocurrencies seriously, just like any other exchange-traded securities
However, due to limited historical data and no precedent, it is difficult to judge what the correlation between Bitcoin and U.S. stocks will look like in the future. But as the market normalizes, this correlation may be slightly decoupled, but given the increasing maturity of the crypto market, the correlation may still be high.
On the other hand, the higher correlation between cryptocurrencies and US stocks may not necessarily be a bad thing. Frankly speaking, many investors have begun to use Bitcoin and Bitcoin-related US stocks as a "return enhancer". Some investors will also use crypto as part of their technological investment allocation, usually allocating a ratio of about 1-5% in the total investment portfolio. With Bitcoin’s price hovering in the $20,000 range, investors may think it is a good entry point to establish or increase investment allocations.
Question 2: How is the correlation between indirect cryptocurrency investment and Bitcoin?
In terms of indirect investment in cryptocurrencies, there are usually two ways:
1, investing in providing topics or industry-specific risk exposure to crypto/blockchain companies, based on pointed out ETF
2, investing in Bitcoin Futures ETF
ProShares Bitcoin Strategy ETF (BITO) is the first and largest Bitcoin futures ETF in the United States, with an asset management scale of approximately US$706.3 million, and the ETF is highly correlated with spot Bitcoin (currently the indicator value reaches 0.98).
Since the beginning of 2022, the ProShares Bitcoin Strategy ETF (BITO) has fallen by more than 55.3%, while the decline in spot Bitcoin price during the same period was 54.4% (the difference is due to the rolling cost of future contracts, which will cause a small drag over time).
In addition, Grayscale Bitcoin Trust Fund (GBTC) is also highly correlated with the Bitcoin spot price; however, due to its premium/discount mechanism, there is still a big difference between the price of GBTC and the price of Bitcoin.
Although index-based crypto ETFs do not directly track the price of cryptocurrencies, most of these ETFs have relatively high correlations with the spot price of Bitcoin, depending on the size of the fund holding crypto US stocks (discussed in more detail in the table below). Examples are as follows:
1, some ETFs holding pure crypto US stocks, such as Bitwise Crypto Industry Innovators ETF (BITQ) and Global X Blockchain ETF (BKCH), and the correlation coefficient with Bitcoin is close to 0.80;
2, Siren Nasdaq NexGen Economy ETF (BLCN) The correlation between topics such as holding more diversified holdings may be slightly lower.
3 and Invesco Alerian Galaxy Crypto Economy ETF (SATO) also hold some diversified shares, but its correlation coefficient with BTC is as high as 0.83, because the ETF's investment allocation to GBTC accounts for 15%.
The following table further studies the connection between crypto ETFs and indexes and Bitcoin by analyzing the correlation between the stock prices of individual crypto US listed companies and the price of Bitcoin. We found that the correlation coefficient between the stock prices of these individual crypto-listed U.S. stock companies and the price of Bitcoin is approximately between 0.60 and 0.85 at this stage.
1. For companies like Microstrategy (MSTR), the U.S. stocks are the most correlated with Bitcoin prices because these companies hold a large amount of Bitcoin on their balance sheet as a "acquisition and holding" strategy (as of June 30, 2022, Microstrategy had 129,699 bitcoins on their balance sheet).
2. Crypto mining companies are also highly correlated with Bitcoin because most of their profits are obtained based on the price of the mined Bitcoin, but may vary depending on the extent to which they manage electricity costs and administrative expenses.
3, crypto exchanges and crypto fintech companies are also relatively high in correlation with Bitcoin, but such companies have lower correlation coefficients than other companies in the crypto ecosystem, because crypto exchanges and crypto fintech companies’ profits usually come from transaction volume, fees and commissions.
Summary
Although Bitcoin’s correlation with the wider U.S. stock market is still high, given the continued market uncertainty and the short history of Bitcoin’s birth to this day (sampled data volume is preferred), it is difficult to distinguish whether this correlation is a short-term phenomenon or a long-term trend.
However, the high correlation between Bitcoin and traditional U.S. stocks is not necessarily a bad thing. You will find that some technology investors have begun to use Bitcoin and Bitcoin-related U.S. stocks as a "return enhancer" and use cryptocurrencies as part of their own technology investment allocation.
Editor in charge: Felix
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-