This article comes fromcaia, by Roxanna Islam, Deputy Director, VettaFi Research

Odaily Translator |

Odaily Translator |

In the current situation of macro market turmoil, "correlation" is a factor that needs to be carefully considered. In fact, the two most discussed "correlation issues" in the crypto industry are:

1. How much is the correlation between Bitcoin and US stocks? What does this correlation mean?

Next, let us analyze together.

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Question 1: How much is the correlation between Bitcoin and US stocks, and what does this correlation mean?

In most of Bitcoin's life cycle, there is basically not much correlation with traditional U.S. stocks, and sometimes it even shows a negative correlation. Because of this, bitcoin is often seen as a diversified investment portfolio or an inflation hedge asset, but in recent years, it has been found that the correlation between bitcoin and US stocks has been rising, and investors are not sure Is this coupling between Bitcoin and US stocks a short-term phenomenon or a long-term trend.

For now, there are two mainstream interpretations of the correlation between Bitcoin and US stocks in the encryption market:

First, in times of market volatility and uncertain market direction, seemingly uncorrelated asset classes will show higher correlations. In fact, in addition to Bitcoin, even the bond market, which is negatively correlated with US stocks, has shown an increasingly positive correlation with US stocks throughout 2022.

Second, the correlation shown between Bitcoin and U.S. stocks may be attributed to the maturation of the cryptocurrency market. Bitcoin has been around for about 15 years, but the cryptocurrency's penetration into mainstream investing has accelerated over the past few years.

A few examples: April 2021, Coinbase (COIN) IPO; 6 months later, in October 2021, ProShares Bitcoin Strategy ETF (BITO), the first futures-based Bitcoin exchange-traded fund in the United States, was officially listed. Additionally, institutional adoption continues to grow, and the SEC, Federal Reserve, and other financial regulators are starting to take cryptocurrencies seriously, just like any other exchange-traded security

On the other hand, the higher correlation between cryptocurrencies and U.S. stocks may not necessarily be a bad thing. Frankly speaking, many investors have begun to use Bitcoin and Bitcoin-related U.S. stocks as a "return enhancer." Encryption, as part of one's own technology investment allocation, usually allocates about 1-5% of the total investment portfolio. With the price of Bitcoin hovering in the $20,000 range, investors might consider this a good entry point to build or add to their investment allocation.

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Question 2: How does indirect cryptocurrency investing correlate with Bitcoin?

When it comes to investing in cryptocurrencies indirectly, there are generally two ways:

1. Invest in index-based ETFs that provide thematic or industry-specific exposure to crypto/blockchain companies

2. Invest in bitcoin futures ETFs that track bitcoin prices

ProShares Bitcoin Strategy ETF (BITO) is the first and largest Bitcoin futures ETF in the United States, with an asset management scale of approximately $706.3 million. The ETF has a high correlation with spot Bitcoin (the current index value reaches 0.98) .

The ProShares Bitcoin Strategy ETF (BITO) has lost more than 55.3% since the beginning of 2022, compared to a 54.4% decline in spot Bitcoin prices over the same period (the difference is due to the rolling costs of future contracts, which can be very large over time. small drag).

In addition, the Grayscale Bitcoin Trust (GBTC) is also highly correlated with the spot price of Bitcoin; however, due to its premium/discount mechanism, the price of GBTC is still quite different from the price of Bitcoin.

Although index-based crypto ETFs do not directly track the price of cryptocurrencies, most of these ETFs have a relatively high correlation with the spot price of Bitcoin, depending on the size of the fund's holdings of crypto US stocks (in the table below Discussed in more detail in ), an example follows:

1. Some ETFs holding pure encrypted U.S. stocks, such as Bitwise Crypto Industry Innovators ETF (BITQ) and Global X Blockchain ETF (BKCH), have a correlation coefficient close to 0.80 with Bitcoin;

2. Siren Nasdaq NexGen Economy ETF (BLCN) and other theme ETFs with more diversified holdings may have slightly lower correlation.

3. Invesco Alerian Galaxy Crypto Economy ETF (SATO) also holds some diversified holdings, but its correlation coefficient with BTC is as high as 0.83, because the ETF's investment allocation to GBTC has reached 15%.

The table below further examines the link between crypto ETFs and indices and Bitcoin by analyzing the correlation between the stock prices of individual crypto U.S. listed companies and the price of Bitcoin. We found that at this stage, the correlation coefficients between the stock prices of these individual encrypted U.S. listed companies and Bitcoin prices range from about 0.60 to 0.85.

1. For companies like Microstrategy (MSTR), whose U.S. stocks have the highest correlation to Bitcoin prices, because these companies hold a large amount of Bitcoin on their balance sheets as a "buy and hold" strategy (as of 2022 On June 30, Microstrategy had 129,699 bitcoins on its balance sheet).

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Summarize

Summarize

While the correlation between Bitcoin and the broader U.S. stock market remains high, it is difficult to distinguish whether this correlation is an A short-term phenomenon, or a long-term trend.