Bitcoin has gained a reputation for its extreme volatility, with price swings that resemble a roller-coaster ride. In 2022, the cryptocurrency plunged over 64%, only to rally 160% in 2023. On the other hand, the S&P 500 offers a more stable performance, providing average annual returns of 9% to 10% while serving as a benchmark for the U.S. economy. Despite Bitcoin outperforming the S&P 500 in terms of returns, the index’s consistency and reliability make it a preferred choice for risk-averse investors seeking predictable investment outcomes.
Glassnode suggests that allocations to cryptocurrency can diversify risk and improve returns in traditional investment portfolios. For example, adding small allocations to the Coinbase Core Index (COINCORE), a crypto index primarily composed of Bitcoin and Ether, to a 60/40 portfolio increased both absolute and risk-adjusted returns over a five-year period ending March 31, 2024. Despite the launch of Bitcoin ETFs, the cryptocurrency showed minimal correlation with major asset classes, indicating its potential as a valuable component for diversification within a portfolio.
Bitcoin exhibited a negative correlation with the DXY index and gold, with a low correlation of 0.11 with the S&P 500. This suggests that Bitcoin’s price movements are largely independent of traditional financial markets. However, the start of Q2 saw BTC down 15% from its highs, coinciding with the DXY index rising above 106, highlighting the negative correlation between the two. The Q2 report also noted a decrease in Bitcoin’s volatility since January 2020, with peaks becoming less pronounced as the cryptocurrency matures into a major asset class.
Tastylive research indicates that there is generally little correlation between Bitcoin and the S&P 500, except during significant price movements of Bitcoin. When Bitcoin’s price movement exceeds 5%, it creates a favorable environment for risk-on trading, leading to bull rallies for both Bitcoin and the S&P 500 index. As Bitcoin’s correlation with traditional equity markets like the S&P 500 and Nasdaq increases while its correlation with gold decreases, it suggests that Bitcoin is behaving more like a risk-on asset rather than a safe haven.
While Bitcoin’s volatility can be a challenge for traders, its potential for portfolio diversification and risk-adjusted returns cannot be overlooked. As the cryptocurrency continues to evolve and mature, its role within traditional investment portfolios is likely to become more pronounced. Investors who understand and leverage Bitcoin’s unique characteristics can benefit from its ability to enhance overall portfolio performance.