If you are thinking about investing in digital assets or cryptocurrencies, you may be wondering… Is Bitcoin a non-correlated asset? I wondered this myself and found some helpful research on Bitcoin’s performance in correlation to other assets which I have posted below.
Why is Asset Correlation Important in Investing?
A good way to manage investing risk is to make sound a series of sound investments that are uncorrelated, or negatively correlated.
By having a basket of uncorrelated, or negatively correlated investments, it is less likely that your investments will suffer a catastrophic loss in the event of a major downturn or a financial crisis.
Burton Malkiel, the author of “A Random Walk Down Wall Street” and investment guru Ray Dalio, founder of hedge fund Bridgewater, both credit uncorrelated investment strategies for some of their success in investing.
What is Asset Correlation?
Asset correlation is a measure of how investments move in relation to one another and when.
Assets are considered “correlated” when the price move of one affects the price move of another, at the same time.
Correlated assets that move in response to one another are considered highly correlated… However, asset price movements can happen together (positive correlation) or in opposite directions (negative correlation).
Assets that move in sync with one another are considered “positively correlated“.
Conversely, assets that move in opposing directions to one another are considered “negatively-correlated”.
If there is no relationship between the pricing moves of one asset and another, they are considered non-correlated.
How is Asset Correlation Measured?
Asset correlation is measured on a scale from -100% to 100% based on historical performance.
Two assets that are 100% correlated will move up or down in value in tandem, as if attached at the proverbial hip…
However assets that are -100% uncorrelated will move in opposition to each other (i.e. if asset A goes up by 20% asset B will go down by 20%).
Historically, gold has been considered a non-correlated asset to equities, aka “stocks”. Some stocks are non-correlated as well. For example timber stocks are not typically correlated with technology stocks.
If two stocks have a correlation of 50%, it suggests that 50% of the time when one stock was going up, the other stock was also going up.
Whereas, if two stocks have a correlation of -50%, it suggests that 50% of the time the two stocks were moving in opposite directions.
A correlation of 0 between investments means that there is no correlation between them.
Correlation between assets is not fixed, meaning it can change over time as situations change involving the assets themselves. In the past 10 years, though, correlation among all assets has been rising.
Is Bitcoin a Non-Correlated Asset?
Bitcoin is not strongly affected by normal macroeconomic factors, such as interest rates, taxes, economic or trade policy. As such, it is possible that the correlation value of Bitcoin to equities is closer to 0 than -100.
Indeed, this is the opinion of the founders of Ark Invest. Their whitepaper “Bitcoin: Ringing the Bell for a New Asset Class” describes the nuances of different asset classes, such as stocks, gold, real estate, commodities against the performance of Bitcoin.
If so, the lack of correlation could make an investment in Bitcoin, and possibly other cryptocurrencies, an attractive alternative asset class to consider in a diversified portfolio that could weather a storm and experience growth, long term.