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May 1, 2020

Bitcoin Up, Stocks Down With BTC Surpassing Gold As Top Investment This Year

By Daily Hodl Staff

Bitcoin is marching to the beat of its own drum as the week comes to a close.

With the Dow down 594 points, a 2.44% loss, and the S&P 500 down 83 points, a 2.87% loss, Bitcoin is up 2.92% at $8,708, according to COIN360 at time of publishing.

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With equities suffering big losses in 2020 and gold up 7.83% on the year, BTC is now the most profitable investment by far, rising 21% from $7,203 at the start of 2020.

Although Bitcoin reacts to massive crashes in traditional markets, such as the widespread economic tumble on March 12th, veteran trader and crypto analyst Scott Melker says the numbers show BTC is clearly an uncorrelated asset overall.

“Correlation has a specific definition based on a mathematical formula with regards to finance. By this definition, Bitcoin and the market are not correlated…

The idea of ranking correlated assets was developed by Markowitz when he presented Modern Portfolio Theory. Using a math formula, you can compare any 2 assets on a scale of -1 to 1. 1 means correlated – if one asset moves 5%, so will the other. -1 means inversely correlated.

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If one asset moves 5%, the other goes -5%. A score of 0 or close means the assets are not correlated. In its 11-year history, Bitcoin has been a .15 – not correlated. This is the closest to 0 of any asset. It recently hit .57, moderately correlated, for a brief time.

The problem with Modern Portfolio Theory is that everything moves nearly to a 1 in a global crisis – including other ‘safe haven’ assets like gold and silver. And Bitcoin still only reached a .57 – moderate correlation. This is math and defines correlation.

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There are 4 assets in legacy markets – stocks, bonds, commodities and currencies. All are correlated to various degrees. They are all valued based on similar factors, like corporate earnings, GDP and interest rates. Bitcoin does not find it’s valuation in any of these things.

As Mark Yusko pointed out in our podcast conversation (most of what I have said here was shared!), Bitcoin finds value from Millennial adoption, government regulation, network value and other completely separate factors. By definition it is uncorrelated…

This is the very reason that all investors should hold some Bitcoin – it offers idiosyncratic risk rather than systematic risk like other assets. Even if it is a riskier asset, having it in a portfolio reduces overall portfolio risk due to this lack of correlation.

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And that is why Bitcoin and stocks are not technically correlated.” 

Despite the lack of a technical correlation, Melker warns that BTC is not a hedge against a global crisis.

Instead, he believes it’s a hedge against hyperinflation and the mismanagement of fiat currency.

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Disclaimer: Opinions expressed at The Daily Hodl are not investment advice. Investors should do their due diligence before making any high-risk investments in Bitcoin, cryptocurrency or digital assets. Please be advised that your transfers and trades are at your own risk, and any losses you may incur are your responsibility. The Daily Hodl does not recommend the buying or selling of any cryptocurrencies or digital assets, nor is The Daily Hodl an investment advisor. Please note that The Daily Hodl participates in affiliate marketing.

Featured Image: Shutterstock/Dim Dimich