As an asset class, cryptocurrencies can give investors uncorrelated stock market exposure to a nascent potential investment opportunity. At least that was the notion heading into 2022, but cryptocurrencies have been following the stock market downward lately, but is it just a temporary move?
“Prior to the pandemic, Bitcoin appealed to many as an inflationary hedge due to its low (near zero) correlation with traditional assets such as stocks,” a Crypto Potato article said.
Of course, as crypto investors are well aware, that uncorrelation has been anything but present in 2022. Inflation fears and geopolitical forces have been pushing stocks and bonds downward, and taking cryptocurrencies along for the ride.
“However, in recent times, the narrative has taken a 180° turn, owing to macroeconomics shifts,” the article added, noting a report by 21 Shares—a Switzerland-based company that offers various exchange-traded products (ETPs) and private funds for cryptocurrency exposure. “According to a report by 21Shares, Bitcoin and the S&P 500 moved in sync, with their correlation rising to an all-time high of 0.69. This bred uncertainty in the usefulness of crypto assets in portfolio diversification.”
The Long Term Says Different
The correlation could prove to be a short-term phenomenon, according to the article. This certainly gives bullish crypto investors hope as bitcoin and a number of alternative coins have been feeling the downward pressure of volatility as the U.S. Federal Reserve continues to hike rates.
The crypto market appears to be stabilizing somewhat, though volatility could strike again at any moment. It’s just the inherent nature of crypto markets to move as such and then change direction rapidly — away from the stock market in the long term, if history repeats itself.
“While it does not dispute the coupling of crypto and traditional assets, 21Shares shows that this is only a short-term event. In its sixth issue on the ‘State of Crypto,’ the company noted that the two asset classes move on distinct paths in the long term,” the article said. “Additionally, the report showed that at 0.07, there is almost no correlation between Bitcoin and gold. From this, 21Shares concluded that the two assets present ‘unique diversification resources for investors’ portfolios.'”
Instead of opting to invest directly in bitcoin, investors can turn to exchange traded funds (ETFs) that target bitcoin futures as opposed to the cryptocurrency itself. For investors worried about security via online cryptocurrency exchanges, the ProShares Bitcoin ETF (BITO) offers the opportunity to invest with confidence in a traditional market exchange — in this case, the New York Stock Exchange.
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