Humans are hardwired to find patterns where they don’t exist.
Back in the day, it was beneficial for our ancestors to picture predators hiding among the leaves, even when they really weren’t there. This Pareidolia kept them safe. Thousands of years on, it makes us terribly susceptible to chart crimes.
One such crime plaguing the Crypto landscape is this idea that “Bitcoin is correlated.”
People argue that these digital assets are having a real consequence on the macro environment.
But the reality is that Bitcoin is far too small a market to have any intermarket relationships at all.
Assets like gold, bonds, and growth stocks are intimately connected because the same players with deep pockets are hugely involved with each and every one of them. But Bitcoin and all the Cryptos are not in that category, at least not yet.
And then we have the Bitcoin Maxis telling people it’s an “inflation hedge.”
Let’s not overcomplicate this.
Bitcoin is Bitcoin.
Copper is Copper
Stocks are Stocks.
If we’re buying Bitcoin, what does it have to do with Japanese Industrials and Crude Oil?
Financial people have a knack for always making things a lot more complicated than they need to be.
Just the action of this year alone should be enough to put this conversation to bed: Bitcoin looks nothing like the other three.
Sure there are times when Bitcoin and Stocks become correlated; then there are others where they couldn’t be any more different.
Typically, only on the rarest of occasions will two highly correlated assets (think Gold and Gold Miners) become slightly negatively correlated.
This just isn’t the case for Bitcoin at all:
The monthly correlation wildly swings from positive to negative.
We don’t see this behavior in assets that are supposedly correlated.
Can this change?
The total value of all Cryptocurrencies is greater than the size of the Silver market, and it’s close to 15% the size of Gold – so it’s heading in the right direction.
But, the data suggests it’s not there quite yet.
Maybe one day, but not right now. The market is simply too small and not sophisticated enough to carry the same level of intermarket correlations as other markets.
Hell, Bitcoin’s market cap literally got cut in half, and systemic stress barely budged. If you were wondering whether there was any systemic risk in Bitcoin, we have our answer.
To be clear, it doesn’t mean that we can’t or shouldn’t position ourselves where appropriate in these Crypto markets to make a tidy buck. Just make sure you don’t fall victim to this correlation illusion.
To finish up, we’ll leave you with today’s Performance Recap:
You can download our latest chartbook featuring nearly 100 Crypto-related assets here.
Alternatively, you can view them online through our Crypto Chartbook, here.