How to tell a good story for Bitcoin?
Last week, the 60-day correlation between gold and Bitcoin reached an all-time high. Correlations with the S&P 500 also made headlines in the weeks leading up to this.
If you're getting dizzy with the rapid change in the correlation metrics you focus on, you're not alone. However, you better get used to it, as the fascination with Bitcoin’s level of correlation is unlikely to fade anytime soon.
What this means for Bitcoin is intriguing. That's not to say that the correlation indicators themselves --- their ups and downs are interesting, but they're not deeper. On a deeper level is why it matters so much to us.
tell a story
When we point to Bitcoin’s growing correlation with the S&P 500, gold, avocados, whatever, we’re looking for an understanding of its mainstream narrative. We hope that the relevant performance leads to clues.
Bitcoin is a difficult asset to pin down. It is a scarce asset like gold, but with a well-documented upper limit. It can be used for pseudonymous transactions, just like cash. For many, it's a speculative holding, like stocks. It's a bet on new technology, like a growth stock. It's a hedge against a dollar crash, a way to spread financial inclusion, and an investment in the evolution of the financial system. … It's all of this, or none of it, depending on which discourse you lean toward.
Still, the narrative we choose for Bitcoin matters. Not only does it shape our investment thesis around the asset, but it also influences our valuation methodology. Do we use the size of the gold market to infer its underlying price? Possibility of payment field? Or is it for something else entirely?
Therefore, in the face of such a hard-to-define statement, we look forward to talking about Bitcoin through correlation. If it is highly correlated with gold, then the market sees it as a safe haven. If it has a high correlation with the S&P 500, it's a risky investment. Bitcoin is a safe-haven if its correlation with the U.S. dollar index drops significantly.
We look to the market to tell us what the function of Bitcoin is.
tell a good story
Bitcoin’s 60-day correlation with the S&P 500 has been declining recently. That must mean it is no longer a risky asset. This is confirmed by its rising correlation with gold, which puts Bitcoin back in the safe-haven narrative.
But wait a minute. As you must have heard, Bitcoin has not been doing well in the past few days. You may also have heard that Tesla had a particularly bad week. I wonder if they are related.
Did you know that it looks like the correlation between Bitcoin and Tesla is increasing! Bitcoin is now more correlated with Tesla than it is with the S&P 500. This must mean that Bitcoin is now considered a tech stock. No, it was seen as representative of market hype. No, I mean it's going to skyrocket.
I'm joking, of course, but the point I'm trying to make is that short-term correlations can tell a good story, but they're not that meaningful.
a story with a happy ending
Correlations are based on price movements, especially in these crazy times where price movements don't always make sense. Overall, prices have become detached from fundamentals and driven by emotions. Sentiment fuels market momentum, which we often mistake for a trend; it also perpetuates directionality in prices, which can exaggerate correlations.
However, when investors are restless, and there's a lot to keep them restless, sentiment can turn quickly. The story has changed again.
This understanding of data to support a story reveals a great need for us humans to put Bitcoin in the context of things we are already familiar with. If you put it in a certain cognitive dimension, it will be easier to understand and easier to make a decision. However, these perceptions are not sustainable in the long run.
In the short term, too: these markets are crazy, and the narratives are all over the place. Bitcoin, never belonging to any one narrative as we know it, is shifting from one story to another, as told by the correlation metrics.
For short-term market movements, what we think Bitcoin's narrative is is not as important as what others think Bitcoin's narrative is. Others drive market changes, so we should know what they are using. The correlation argument is useful for this.
Correlation is more important for portfolio diversification than anything else for long-term market movements. In the not-too-distant future, hopefully, the market will be less chaotic, and even short-term covariance and other relationships may be more stable and easier to use for planning purposes. At that point, Bitcoin's correlation may start to matter less to the story and more to how the asset is distributed.
At that time, we will hopefully no longer place Bitcoin in a pre-set cognitive framework. It will find its way.
Original source: Coindesk's Newsletter
