U.S. equities had its worst day in a year on Black Friday, down 2.3%. Bitcoin ("BTC") fell even more, down over 7% during the day. BTC is many things to many people, from an instrument of world peace to a source financial instability. For enthusiastic investors, BTC promises not only to be a wonderful returning asset but also an important portfolio diversifier, a safe-haven asset that is a potential alternative to gold. Hmm, okay...so BTC fans have big expectations! True, in years past, when BTC was an obscure crypto-thingy interesting only to techno-geeks, it was largely uncorrelated to public equities. But as BTC has become mainstream, its volatility (always high) and correlation to broader markets have increased as well. Consider that in 2019, BTC exhibited a beta of -0.28 to the S&P 500; in 2021, its beta has risen to +1.83!
Source: Yahoo Finance, Mantabye
But what really highlights BTC's increasing correlation with public equities is the growing dichotomy of the cryptocurrency's performance on days the market is up versus when it is down, as shown in the up/down capture chart below. Over the past three years, the S&P 500 has been up on 320 days or 58% of the time; the positive days are roughly equally distributed across each year. In 2019, BTC was, on average, positive when the market was negative and captured roughly 50% of the market's upside on positive days. In 2021 so far, BTC has on average underperformed the S&P 500 on market down days and outperformed on market up days, consistent with its growing beta of ~2x.
Source: Yahoo Finance, Mantabye
BTC's seeming change from a diversifying asset to a levered equity bet is best reflected during large market moves, defined as +/-1% days. The S&P 500 had 115/85 of them, respectively, over the last three years. As shown below, BTC has gone from exhibiting characteristics of a safe-haven asset in 2019 to becoming the go-to "risk-on" asset in 2021. And it's not just BTC. Ethereum, the second most popular cryptocurrency, exhibits an 80%+ correlation to BTC and displays similar dynamics. (Together, Bitcoin (50%) and Ethereum (25%) make up 75% of the $2 trillion crypto market, i.e., basically the whole market) By contrast, gold continues to be a source of diversification in
periods of stress (if not a great source of returns). As they say, all that glitters is
not gold...
Source: Yahoo Finance, Mantabye
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