- Over the long-term, Bitcoin and S&P 500 correlation likely to return near zero levels
- Allocating a small percentage to either gold or bitcoin increases the resistance of a portfolio
Historically, Bitcoin has been relatively uncorrelated with the S&P 500, staying between .15 and -.15 since 2012. Over the last month, however, the correlation shot up. It peaked on Black Thursday when both crypto and equity markets experienced historic and sudden losses.
But it doesn’t mean Bitcoin and S&P 500 are suddenly correlated because this short-term correlation spike has been under very unique circumstances, shared Coin Metrics in its latest report.
The news of spreading COVID-19 pandemic also has the correlation between SPY and GLD suddenly surging to its highest level since 2013, likely due to liquidity crunch leading to sell-offs across the board.
As a matter of fact, Bitcoin fundamentals didn’t change over the last month although the outside world did. In the short-term, it is expected to continue but in “over the long-term, Bitcoin and S&P 500 correlation are likely to revert to the mean and return to levels of near zero.”
As for its correlation with gold, historically it wasn’t very strong but suddenly increased in March just like with SPY.
“Although Bitcoin and gold may not act as safe havens during a global liquidity crisis, they may act as a safe haven during increases in monetary inflation and quantitative easing.”
Just a small allocation to Bitcoin outperforms other portfolios
Interestingly, both bitcoin and gold outperformed traditional equity portfolios.
In Q1 of 2020, risky assets across the world retracted as lockdowns to curb the spread of COVID-19 put pressure on the world economy. While both of these hard assets declined alongside US equities as investors fled to cash, Bitcoin and gold have recovered the majority of their losses.
Crypto data tracker TradeBlock analysed three different model portfolios, Equity + bond 60:40, Equity + bond + bitcoin 55:35:10, and Equity + bond + gold 55:35:10.
This revealed that a portfolio with just a modest allocation to bitcoin outperformed the equity and bond only portfolio and also the one containing gold.
“Allocating a small percentage to either gold or bitcoin increased returns.”
This week, US banks will be reporting their first-quarter earnings which were ridden with the challenge of near zero interest rate and a free-falling US economy.
Japanese conglomerate SoftBank is expected to lose nearly $17 billion for their tech-focused Vision Fund. Wells Fargo’s profits plunged about 50% in the Q1 and its shares dropped over 40% YTD while JP Morgan’s net income was down 69% and its shares are down 30% YTD.
Public crypto companies also reported losses but for Q4 2019. In the past week, Galaxy Digital reported a net income loss of $32.9 million and experienced layoffs in February 2020. Canaan reported a net income loss of $148.6 million loss for the fourth-quarter ending 2019. The Bitcoin miner equipment manufacturer’s net income declined and its share price (CAN) dropped 60% since its IPO.