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Could Bitcoin’s decoupling from stocks Revive Bitcoin’s Appeal to Investors?

Bitcoin declining correlation to stocks attracting investor appeal

With Inflation concerns and the U.S debt standoff casting doubt over Bitcoin’s prospects, could Bitcoin’s decline with stocks revive its appeal for Investors?

According to a report by crypto research firm K33, the correlation between Bitcoin's (BTC) price and the NASDAQ index has reached its lowest point in 17 months. This decline in correlation is now making Bitcoin an attractive option for portfolio diversification.

K33's data reveals that BTC's 30-day price correlation with the NASDAQ index, which is known for its focus on technology stocks, has dropped to 0.26. This marks the lowest level observed since December 2021. Additionally, the correlation between BTC and the S&P 500 index also experienced a significant decrease, reaching levels not seen since late 2021.

Bitcoin, being the largest cryptocurrency in terms of market capitalization, has historically appealed to investors due to its independent price movement in comparison to other investment classes, particularly equities. This unique characteristic has made it an appealing choice as part of a diversified portfolio.

However, the narrative surrounding Bitcoin shifted last year when the digital asset market experienced a decline from its all-time highs, paralleling the downturn in stock markets. The correlation between cryptocurrencies and traditional markets reached new heights as central banks globally implemented aggressive interest rate hikes to combat surging inflation. This monetary tightening had a negative impact on the prices of rate-sensitive and risky assets, including stocks and cryptocurrencies.

Graph chart showing Bitcoin Correlation with Nasdaq and the S&P 500 from K33 Research

While these events had a significant impact on Bitcoin’s price and volatility, the hedging activity of market makers, who consistently take positions opposite to those of investors, seems to have significantly contributed to keeping both Bitcoin (BTC) and Ethereum (ETH), the top two cryptocurrencies by market value, unusually calm as of late. And now that things have calmed down, this could be a good opportunity to use Bitcoin (BTC) as a solid portfolio diversifier or return driver for investors.

Diversifying with BTC

According to the same research by K33, including a modest portion of BTC in a traditional investment portfolio enhances its overall performance.

They discovered that a portfolio consisting of a 3% allocation to BTC, 58.5% to stocks, and 38.5% to bonds has consistently outperformed the conventional 60% equities and 40% bonds investment strategy over time.

Graph chart showing increased return performance of portfolio with Bitcoin

Even when measured from January 2018, which marked the beginning of a two-year bear market for cryptocurrencies, the portfolio that incorporated BTC would have surpassed the alternative by 6.9%, as reported by K33.

However, it's crucial to consider various factors when investing in cryptocurrencies in general. One important factor is the ability to withstand the periodic downturns that crypto experiences, which are often rapid and severe. While long-term crypto enthusiasts who adopt a "HODL" mindset have typically fared well, more cautious investors can easily become overwhelmed by extreme short-term price fluctuations – one of the things Cryptocurrency is well-known for.

Furthermore, the volatile nature of cryptocurrencies means that even small allocations can have a significant impact when combined with other holdings in a portfolio. As a result, many investors tend to minimize their exposure to cryptocurrencies.

It's important to note, though, that Bitcoin's low correlation with traditional asset classes may not always hold true, as it has been known to surge during market corrections.

Therefore, while diversification is one potential reason to include Bitcoin in your portfolio, it's worth recognizing that Bitcoin and other cryptocurrencies also have the potential to drive higher returns. The CEO of Hilbert Group emphasizes this point, stating that "Cryptocurrencies also serve as return drivers for a portfolio," and suggests that a portfolio with a crypto allocation could yield significantly higher returns without altering the risk level.

Looking to get started with Bitcoin to diversify your portfolio or improve your returns? XChangeX is the Cryptocurrency exchange built by Traders, For Traders, and you can get started right here. Trade Smarter with XChangeX and build your Crypto Portfolio today.

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