How does the correlation between BTC and traditional asset classes evolve?

Author: Ben Strack, Blockworks; Translation: Wu Zhu, Golden Finance

Digital assets are not exactly the same as other assets. This is also why they attract many people, but it may also cause confusion.

As more and more investors seek diversification and hedging opportunities, attempting to quantify the relationship between BTC and other asset classes has become increasingly common.

A recent report by FTSE Russell (FTSE Russell) has made a clear finding: since 2020, the rolling correlation between Bitcoin and Ethereum returns and risk assets has sharply increased.

If we pay special attention to BTC, the correlation between the Russell 1000 Index composed of US large-cap stocks and the asset is 0.58. The correlation between BTC and US financial stocks and US technology stocks is almost equally strong, at 0.53 and 0.52, respectively.

Since the pandemic, the correlation between BTC and U.S. high-yield credit (the most “risky” fixed-income asset class) is 0.49.

Before the outbreak of the pandemic (stimulating inflation and monetary tightening), all these correlations were closer to zero.

The correlation between 7-10 year US Treasury bonds and BTC did not significantly increase after the COVID-19 pandemic, which is quite unique. The US dollar is the only asset that has been negatively correlated with BTC and ETH in recent years.

Although Bitcoin is often compared to gold, the BTC-gold correlation during the post-pandemic era is only 0.15.

The report points out that the high volatility of BTC (as well as the difference in the importance of hedging and value preservation characteristics in the financial market) may overshadow the ‘true correlation’ between the returns of these assets.

It adds: ‘But the real correlation may be low, reflecting the fact that Bitcoin and ETH are primarily risk assets, while gold, as a ‘safe haven’ asset, has a long history of trading, even if they do have some common preservation features.’