Bitcoin's Correlation with Traditional Assets Soars Post-Covid

Bitcoin's Evolving Correlation with Traditional Asset Classes

The correlation between Bitcoin (BTC) and traditional asset classes has been a subject of interest as more investors seek diversification and hedging opportunities. A recent FTSE Russell report found that the rolling correlations of BTC and Ether (ETH) returns have sharply increased with risk-on assets since 2020.

In the case of BTC, the Russell 1000 index, comprising US large-cap stocks, has a 0.58 correlation with the asset. Similarly, the correlation with US financial stocks and US tech stocks stands at 0.53 and 0.52, respectively. The correlation between BTC and US high-yield credit, the most "risk-on" fixed income asset class, is 0.49 since the Covid-19 outbreak.

Prior to the Covid-19 pandemic, these correlations were much closer to zero. However, 7-10 year US Treasurys remained relatively unique in not seeing a meaningfully higher correlation to BTC post-Covid. The US dollar is the only asset showing negative correlation to BTC and ETH over those years.

Despite Bitcoin often being compared to gold, the BTC-gold correlation in the post-Covid era is only 0.15. BTC's high volatility and varying importance in financial markets may obscure the "true correlation" between these assets' returns. However, the true correlation may simply be low, reflecting the fact that BTC and ETH are predominantly risk-on assets, while gold has a long-established trading history as a "safe haven" asset.

As the dialogue around digital assets evolves, it remains essential for investors to stay informed about the implications of such developments on market stability and monetary policy. The growing interest in digital asset integration within established financial systems highlights the importance of regulatory clarity and the potential risks associated with cryptocurrencies.