One of the more interesting things about Bitcoin, that I’ve seen over the last few months, is that it seems to be trading in the very opposite direction of a stock. So on days, when stocks were down, I was noticing that coins up and vice versa. And so I wanted to take a deeper look at that because that’s a really important and valuable thing to happen for a financial asset.
So basically I went and punched a bunch of data going back five years. On bitcoin and S&P 500 returns and what I found was interesting, and what I found was the Bitcoin is becoming uncorrelated to the S&P 500.
So the reason that matters is because of institutional investors, especially those with tens of billions of capital those, like Pension funds and large macro funds, the Bridgewaters of the world, the CalPERS of the world. They look for places. They can deploy lots of capital that will give them. Not only positive performance but also reduce risk and what you have.
What is an uncorrelated asset, and why should investors care?
We have uncorrelated assets moving in opposite directions or moving and directions that don’t act in lockstep together is, you can have a total portfolio of a bunch of different assets with different characteristics that, on the whole from a portfolio perspective created a nice return with not a lot of volatility, right? So uncorrelated assets mean that you can invest in assets that you know, really can give you a loan.
Volatility smooth growth of your portfolio over time. So you don’t have these massive whips all up and down your portfolio. You just have this smooth growth curve.
We’ve seen a lot of asset markets move together over the last five or ten years, especially with, the introduction of QE (quantitative easing) across the globe. So you’ve seen bonds and stocks moving together quite a bit, over the last few years and so it’s been hard to find on correlated assets, even real estate.
That real estate’s been going up kind of with stock. So especially in downturns, that’s really the time when you want to have low volatility, because you know everyone else in the, maybe seeing high volatility in their portfolios, that are not well diversified and so they can be forced to do things, that are not optimal like, selling certain positions or having investor redemptions and things like that.
So institutional investors really crave uncorrelated or negatively correlated assets in downturns, especially because smoothing out, that volatility in a downturn gives you an opportunity to outperform, but also an opportunity to have some stability in your portfolio, so It’s really really important investors are definitely looking for on correlated assets in a world where almost all assets.
When institutions are going to start coming in if they haven’t already and what that’s going to look like and maybe what does that mean for Bitcoins price over the next few years?
It’s early day suffer from a couple of issues, that kept institutional investors outright just the absolute size and crypto markets were small but also things like being able to have like long price history, just having more years of performance history helps a lot.
Like for instance if you’re starting a hedge fund. It’s really hard to get Pension funds to invest in your hedge fund.
If you are in year one of your fund’s life, right? They like to see a nice five or ten-year track record.
And so the same is true of any new asset class.
And so, that was hampering crypto in its early days and now we’ve also seen lots of other things that are coming out in crypto space of help as well, like Custody and Futures markets and things like that
And so when I look at those developments in conjunction with something like, the data that shows me that what we may have, here is an actual uncorrelated asset class. Less than I I know for a fact that institutional investors are going to start to perk up at that.
I initially was looking at I compiled data from the sp500 daily returns as well as the Bitcoin daily returns going back about five years or so and you know, I even looked at the, you know, rolling 10 days 5 day and 30-day correlations.
Why stocks and crypto are a nice compliment to each other?
I think it’s actually more helpful most institutional investors will look at correlation on like the basis of a monthly return typically, so when I looked at the monthly returns correlation between Bitcoin in the S&P 500 which as you probably know the sp500 is one of the broader more, you know, actively followed stock indexes of the top 500 stocks in u.s.
Yeah, but I think it’s actually more helpful most institutional investors will look at correlation on like a monthly returns basis typically, so when I looked at the monthly returns correlation between Bitcoin in the S&P 500 which as you probably know the sp500 is one of the broader more, you know, actively followed stock indexes of the top 500 stocks in the u.s.
So it’s pretty good. It’s a pretty good indicator of stock performance generally, but when I look at the rolling 12-month correlation of the monthly returns between the S&P 500 in Bitcoin what I found was interesting in the last two years, especially we’ve seen a 0 to slightly. Negative correlation between the S&P 500 and Bitcoins and that’s like I said before really really important because when you have an asset classes that are Uncle correlated or even slightly negatively correlated, it’s a really really fantastic thing for a portfolio that invests in different asset classes because it Smooths out volatility, it allows investors to get positive Returns on a very consistent month-to-month basis. And so if you know allocated your portfolio the right way, but Between you know crypto and sp500 for instance. You might be able to construct a portfolio that delivers a nice positive return almost every single month, which is pretty phenomenal. That means like even when the S&P 500 has a down month to the portfolio is going to have enough month and vice versa. Even when Bitcoin was down month, you might see a positive return for your portfolio.
So it’s a really powerful thing to see this in the data cool. So to recap so institutional investors look for assets that are Non-correlated when one goes up and the other is going down, that can just mean a smoothing of the overall growth of the portfolio. So better risk-adjusted returns.
All you know things that institutional portfolio managers are crunching data on but you said its risk-adjusted returns and just a nice smooth portfolio growth curve.
Why do we expect institutional investors will be a source of net inflows into bitcoin?
I think they’re institutions out there that probably started accumulating and you know, I think a prime example of that maybe Bridgewater, Ray Dalio. I know his step away from the day-to-day someone at Bridgewater, but he has said that he’s been looking at asset classes like gold and Bitcoin as potential for the next And I’m excited to go and so I have to believe that you know, his strategist at Bridgewater is part of that they crunch that data and they’ve really started to look at this asset class.
I am long-term goals on bitcoin, but I believe that bigger players are starting to come in. The space I mean, I remember in 2013 to 15 when nobody would even listen to me talking about this stuff and they thought we were all crazy and it was a scam.
Now. It almost seems like they’re pressured that if they have no Bitcoin in their portfolio investors might start asking why and even jump ship and go somewhere else
I think even Beyond this idea of it being a positive expected return asset class. That’s not correlated. You’ve also got the idea here that it’s a potential hedge against you know monetary.
And hedge against, some sort of like Financial Calamity in the traditional financial system. Obviously, there are opinions on the macro side from all ranges, right and some people are doing Bloomers.
Some people are just hardcore, government back Fiat is the only type of money and the reality is we don’t know how this is gonna play out.