Does bitcoin act like digital gold? Embarrassingly, it moves in close correlation with risky stocks

bitcoin, China Evergrande Group

When Wall Street makes the case for cryptocurrencies, it’s all about the benefits of diversification. But when markets go down, bitcoin has an embarrassing habit of getting swept up in the sell-off.

Bitcoin plunged as much as 11 per cent on Monday as stock markets trembled in the wake of a potential default from China Evergrande Group. A correlation analysis shows that US stocks and bitcoin are moving more in lockstep, with the link between the two assets at the strongest level in a year.

One explanation is simply that bitcoin remains a volatile investment – meaning that when investors start to de-risk their portfolios, they start dumping cryptocurrencies.

The current backdrop of big news events explains why bitcoin and stocks are more closely linked, said Vijay Ayyar, head of Asia Pacific with cryptocurrency exchange Luno in Singapore. “There’s a bit of uncertainty in the markets with the upcoming Fed taper talks and meetings,” he added.

Other analysts have said bitcoin is likely to mirror risk-on and risk-off moves as it becomes easier for professionals to access cryptocurrency via futures exchanges and exchange-traded funds. In July, when the S&P 500 sank more than 2 per cent during the day, bitcoin fell about 6 per cent over two days.

To be sure, academic research has shown that bitcoin can work in portfolio diversification. A study from the University of Bath found that there are benefits to a portfolio from some exposure to cryptocurrencies.

Other enthusiasts argue that the volatility is because the asset is so new. They see bitcoin gaining widespread acceptance and eventually more institutional cash, which will stabilise prices so that it behaves more like an alternative hedge.

Still, the moves speak to a long-running debate about what exactly is the investment reasoning behind cryptocurrency. Is it a risk asset or safe haven, an inflation hedge or symbol of speculative excess?

The view that bitcoin can be an another option alongside cash and gold holds a lot of sway, despite all of market’s volatility.

Last week, billionaire Ray Dalio told CNBC that he owns some bitcoin, saying it’s “worth considering all the alternatives to cash.”

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