Cryptocurrency advocates can offer a multitude of reasons for their enthusiasm. I agree that blockchain is an innovation that is nowhere close to seeing all its benefits realized. There are certainly valid reasons to consider alternative payment mechanisms and methods of financing. Yet one of the rationales for crypto is that it can offer a non-correlating store of wealth in times of crisis. To this, I rebut with the following graph:

Bitcoin (white) vs. S&P 500 Index (SPX, blue), November 22-30, 2021

(Click on image to enlarge)

Source: Bloomberg

Does this look like a non-correlated asset to you? If so, I’d like to figure out what I’m missing. The past two weeks is hardly a robust data set, but I have been struck by how closely the daily movements in bitcoin have begun to parallel those of SPX. 

We were beginning to see the resumption of a “risk on/risk off” mentality returning to the market even before the news about the Omicron Covid variant spooked global markets last week. Friday was one of the more epic “risk off” days that we had seen in quite some time, perhaps since the initial Covid crisis in early 2020. Bond yields, which were widely expected to rise as the Federal Reserve reduced its monetary accommodation, plunged precipitously while global equity indices did the same. That is a classic sign of investors’ flight to safety. Since lower bond yields reflect rising prices, it meant that government bonds did indeed prove to be a reasonable hedge against falling equities and other risk assets.

Bitcoin, on the other hand, moved almost in lockstep with equities – except with more volatility. That is exactly what one does NOT expect from a hedge. At a minimum, a hedge is supposed to offer some ballast to a portfolio, not add volatility. The volatility could be desirable if it moves counter to the asset that is being hedged – think about Friday’s rise in VIX, which rose sharply as stocks fell. But bitcoin has done neither. It added volatility to one’s portfolio without acting in a decorrelated manner.

Perhaps bitcoin is a victim of its own success. It is quite possible that many investors now view bitcoin as a core holding, much as they do stocks or bonds. As noted earlier, there are quite valid rationales for doing so. But over the past few days, at least, it appears to be acting more as a supercharged companion to an equity portfolio, not as a stable, decorrelated asset class. Sorry, it is acting just like another risk asset.