Not too long ago, bitcoin and its universe of cryptocurrency peers seemed light years away from traditional markets, a distant point where assets traded under their own laws of physics.

But capital and investors from traditional markets have flowed into cryptocurrencies, making some of them behave like traditional assets—just far, far riskier.

Bitcoin has had a terrible year. It dropped by more than half in the first several weeks of 2018, wobbled up and down for several months and then tumbled sharply again in the fourth quarter alongside wilting stock markets. For an asset branded as an alternative to the traditional financial system, it has offered little haven. Bitcoin stood at $3,630.94 Thursday evening. Its high for the year came near $17,000 in January.

Bitcoin’s correlations to other assets aren’t strong, but they are measurable. On a scale of -1 to +1, ranging from completely inverted to perfectly correlated, bitcoin traded at about a 0.84 correlation to gold over the past five days, according to data from research firm Excalibur Pro Inc. That isn’t unexpected for an asset its backers bill as a new version of the yellow metal. Bitcoin also traded at a 0.77 correlation to the Chicago Board of Options Exchange’s VIX index, which measures market volatility.

It makes sense that bitcoin would trade in step with the market’s “fear gauge.” With central banks over the past decade flooding global markets with liquidity and with extremely cheap borrowing costs, money found its way into riskier assets. And there is no riskier asset than a rebel currency.


One example of institutional money coming into the sector is the growth of the Bitcoin Investment Trust, an over-the-counter exchange-traded fund sold by Grayscale Investments. In 2013, its first year of existence, the trust had $51 million in assets under management. By the end of 2017, assets had swelled to about $3.5 billion. With the selloff this year, that had fallen to about $900 million recently.

Another pathway has been venture capital. In 2013, venture-capital investment in the bitcoin and blockchain sector totaled only $96 million, according to data from CoinDesk. In 2016, it was about $500 million. By the end of 2017, all-time VC funding climbed over $2 billion.

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Whatever the actual dollar flows are in the future, traditional capital appears set to continue coming into crypto markets. Bitcoin’s backers are making efforts to attract institutional money to their asset class. They are building services like exchanges that can pass regulatory muster, futures trading and even exchange-traded funds.

If any of those efforts is successful, then more professional money will likely come into the sector. That means traditional markets’ vise around bitcoin will only tighten.


Write to Paul Vigna at paul.vigna@wsj.com