However, in the first half of this year, the digital currency has been increasingly correlated to equities and other risk assets. Despite a slight rally in recent days, Bitcoin was down 36% year-to-date as of market close on Tuesday. Tech stocks such as Amazon, Netflix and Meta Platforms (formerly Facebook) are down about 32%, 68% and 40%, respectively, year-to-date.
Last Thursday, Bitcoin plummeted below US$26,000 for the first time since December 2020. More than US$200 billion was erased from the market that day alone.
Alex Tapscott, managing director of the digital asset group at Ninepoint Partners, which manages the Ninepoint Bitcoin ETF, has observed the increasing correlation this year between Bitcoin and tech stocks.
“That tells me a couple of things: one, it’s an asset class that’s more widely held. It’s held by a lot of institutions, it’s quoted in mainstream media. So it is beginning to trade like a more conventional financial asset,” he said. “But it’s also a little disappointing, because one of the big attributes of Bitcoin, historically, has been that it’s uncorrelated, which can improve measures of risk-adjusted returns when added to a portfolio.”
Tapscott said he thinks Bitcoin will regain that role of being an uncorrelated asset over the medium and longer term. “But it is clear that during times of financial stress, in all markets, that it does begin to converge on the performance of other kinds of assets.”
Greg Taylor, chief investment officer at Purpose Investments, said a certain type of investor could be contributing to Bitcoin’s turbulence.
“It feels like a lot of the investors that took on more risky positions — whether it’s in technology, or startups, or private assets — also hold Bitcoin. So those parts of the portfolio are being hit,” said Taylor, whose firm manages various Bitcoin and Ether ETFs.
“It could also be that they’re just selling anything to make margin requirements or to pay bills.”
Despite last Thursday’s dramatic drop in Bitcoin, Taylor said there haven’t been a significant amount of outflows for any of Purpose’s crypto funds. In fact, he said one day last week, the company had its “biggest day of inflows” for its Bitcoin ETF in U.S. dollars.
“Given the space and the volatility that we know, there was probably a little bit of ‘buy the dip.’ People have been targeting Bitcoin to come back to $30,000. So when it hit that level, that’s where we saw some buying come in,” he said.
Amy Arnott, portfolio strategist at Morningstar, wrote an article in April about whether crypto is truly a portfolio diversifier.
Arnott noted Morningstar’s 2022 Diversification Landscape Report, where the firm examined how different asset classes performed and how correlations between them had changed in the past couple of years.
“We found that while cryptocurrency has an unusually low correlation with traditional asset classes, its volatility makes it tough to use in a diversified portfolio,” she wrote.
Arnott cited the CMBI Bitcoin Index’s 2021 performance, noting how it was up 104% in Q1, then dipped 40% in Q2, then gained 25.3% in Q3 before falling into the red in Q4 as high-risk assets sold off in December.
“These dramatic performance swings have continued in early 2022,” she wrote.
“Diversification value is one potential reason to add cryptocurrency to a portfolio, but investors should also consider other factors, such as their ability to hold on through crypto’s periodic downdrafts, which have been unusually swift and severe.”
Despite the recent crypto volatility, Tapscott said Bitcoin has been a good long-term diversifier and has “demonstrated an ability to improve risk-adjusted returns.” And the run-up until the last few months has been astounding, if volatile.
Tapscott cited data released last year by Charlie Bilello, founder and CEO of Compound Capital Advisors, which showed that from 2011 to 2021, Bitcoin was the best performing asset class over the 10-year period, with an annualized return of 230%.
Bitcoin was trading above US$60,000, near its peak, at the time of the study, and a lot of its gains came during the pandemic when tech stocks also soared. At the beginning of 2020, Bitcoin was trading at about US$7,300.
“We’re still believers that crypto is going to be something that’s going to be with us for a long time. It’s not a flash in the pan — there will be some utility that comes out of this,” Taylor said.
He compared crypto to the dot-com bubble in the late 1990s.
“There were a lot of companies that came out, and a lot that failed. But, at the end of the day, you’re still going to get the Amazons, the Facebooks, the Googles that come out of that,” he said. There’s still some “sorting out” of the crypto market’s winners, he said.
Tapscott and Taylor both acknowledged crypto’s volatility, which is why they’d recommend an allocation of 5% or less for the average investor.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
