Is Bitcoin An “Uncorrelated Asset”?

Some bitcoiners like to say “Bitcoin is an uncorrelated asset”, implying that its price movement is completely decoupled from the price movement of other asset classes. Investing in combinations of uncorrelated assets can reduce the overall risk in a portfolio and event boost the overall return. But is that really the case? With this tool, data is analyzed with the aim to back up or dismiss the claim.

The Pearson Correlation Coefficient

The Pearson correlation coefficient is a beneficial mechanism to measure this correlation and assess the strength of a linear relationship between two data sets. It takes values between -1 and 1. -1 is a strong negative correlation, 0 implies no correlation at all (uncorrelated) and +1 stands for a strong positive correlation.

Looking at this study, a coefficient of 1 essentially equates: if one asset goes up, the one we are comparing it to tends to go up, as well. This also happens vice versa. A good example for a coefficient of almost 1 is the comparison between the S&P 500 and the Dow Jones stock index. Both track the performance of blue-chip stocks. Consequently, it comes as no surprise that the correlation chart for S&P vs. Dow Jones looks like the following:

Cryptocurrency vs. Cryptocurrency

How do cryptocurrencies correlate with each other?

In order to have sufficient data at hand, we took 5 coins with a long price history into consideration. They display a strong positive correlation. This is no news to anyone who followed the market over the last couple of years.

It is, however, noteworthy that this has not always been the case.

Bitcoin vs. Ethereum

Assessing the development of the correlation coefficient between BTC and ETH since 2016 with a 180-day rolling window, the analysis returns something like this:

We started with almost no correlation. There were times in between when it seemed like they moved uncorrelated. But the trend clearly indicates a growing relationship between Bitcoin and Ethereum.

Bitcoin vs. Gold

There is no correlation whatsoever between the price movements of Gold and Bitcoin.

Bitcoin vs. Stocks

Not taking the recent Corona-induced crash into account, it is evident that the Bitcoin price movement is equally uncorrelated with the stock market. Even though Bitcoin and the S&P 500 both took a hit in March 2020, resulting in a growing correlation, it is still relatively weak.

If we disregard these short term trends and look at the 2-year rolling window since 2016 the BTC / S&P 500 coefficient it looks like follows.

Bitcoin and stocks are completely uncorrelated! Incidentally, the chart for ETH vs. S&P 500 looks the same.

Gold vs. Stocks

We find the same case again: there is no correlation to be found.