Bitcoin Correlation Over The Last 5 Years
Bitcoin is well known for catching investors off-guard with its volatility. It can do nothing for months on end, then move fifteen percent in a day in the opposite direction you thought it would. While this can be a deterrent for some, it does imply that bitcoin behaves differently to other investments. In this article, we will examine bitcoin correlation with other assets over the last 5 years.
What is Correlation?
Two investments are correlated if they move in a similar way. They are uncorrelated if they do not.
Diversification works better when assets are uncorrelated or negatively correlated. If you own stocks and bonds, for example, bonds might go up when stocks go down.
We can use a statistical tool called the correlation coefficient to find the correlation between any two investments. This can have a value between 1.00 and -1.00.
The table below explains this in more detail:
Table explaining the range of correlation coefficients for two assets.
Bitcoin correlation with other assets
We can download price data for the last 5 years (1 September 2015 to 1 September 2020) from Yahoo Finance. I used the following US dollar price data for each type of asset:
- Bitcoin: Bitcoin USD CCC-Coinmarketcap (BTC-USD)
- Global Stocks: iShares MSCI World ETF (URTH)
- Global Bonds: Xtrackers II Global Aggregate Bond Swap UCITS ETF 1D (XBAG.SW)
- Gold: SPDR Gold Shares (GLD)
- Silver: iShares Silver Trust (SLV)
Next, we can calculate the monthly returns for each of these assets in Excel. Using the Excel data analysis tool, we can get the correlations:
Asset correlations (September 2015 – September 2020). Data souced from Yahoo Finance.
We an see from the above table that bitcoin had low positive correlations to global stocks and bonds over the last 5 years. And bitcoin was slightly more correlated with bonds than stocks. This is an interesting find considering bitcoin is usually a ‘risk on’ asset.
Bitcoin correlation with gold and silver were both just below zero, suggesting small negative correlations with these commodities. This too is interesting when you consider that bitcoin is also a scarce commodity like gold.
To conclude:
Based on the above results, bitcoin has not had a strong relationship with other asset classes over the last 5 years. This suggests that bitcoin is good for diversification when owned as part of a broader investment portfolio.
These correlations will change over the next 5 years as bitcoin matures as an asset class. Will bitcoin become more correlated with traditional risk assets like stocks, or safe haven assets like gold and bonds?
I guess we will have to wait another 5 years to find out!
