The Studies that Turned Bitcoin into an Asset Class

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Many studies have little effect except at the edges, but some studies change the world, in this case the bitcoin world.

Amid tainted coverage in mainstream media and think tanks, it is academia that came to the rescue of bitcoin with one of the first paper to study its relationship with other assets finding there is no correlation.

“Bitcoin Has Zero Correlation With Dow Jones, Nikkei 225, Gold or Oil Finds New Study,” we reported in February 2018.

This was by the Stockholm University covering November 2013 to February 2017. It concluded bitcoin is very useful for diversification in line with the Modern Portfolio Theory.

Another study at the same time, covering September 2015 to the 29th of December 2017, found that there is week to no correlation between cryptos and fiat pairs, but some appear to be correlating more than others.

This did not cover the dollar, but it suggested that there does appear to be an inverse correlation relationship between bitcoin and the pound, the Canadian dollar, which usually acts like the USD, as well as bitcoin and the Yuan.

When academia talks, people tend to listen and so things can move fast. In April of that year therefore, a study said bitcoin was becoming a regular market, like forex:

“In spite of its virtual nature and novelty, the Bitcoin market has recently and rapidly developed the statistical hallmarks which are empirically observed for all ‘mature’ markets like stocks, commodities or Forex.”

In August 2018, researchers from Toronto’s York University found bitcoin does better than gold, stating:

“We find that it is possible for an investor to substitute bitcoin for gold in an investment portfolio and achieve a higher risk adjusted return.”

There were other studies largely confirming all these results in regards to assets correlations, fiat correlations, and indeed gold substitution which later on gave rise to the inflation hedge theory.

Many of these studies however found bitcoin is not a good hedge, except maybe for fiat, because it either has no correlation or weak correlation – which we take to mean for a period of time.

Instead they’ve all concluded, at least the ones we have seen, that bitcoin is very useful as a diversifier with its addition to a portfolio providing higher risk adjusted returns.

Back in 2018 these studies used to suggest 1% of a portfolio should be allocated to bitcoin, but later they started recommending 10%.

Indeed as late as 2021, afterwhich we stopped prioritizing these studies as a consensus appears to have been reached, a paper by the Warsaw University confirmed that bitcoin does not correlate and that “the bitcoin-inclusive portfolios perform better than those consisting solely of traditional assets.”

Relevant for today, a 2020 study which again confirms there’s no correlation between bitcoin and stocks, also found that interest rate movements are far more predictive of stock prices than bitcoin.

2019 perhaps proved as much, although bitcoin did end that year doubling, but another late 2020 study found that the dollar affects BTC.

“USD prices can cause the movement of the Bitcoin prices, while the Bitcoin prices cannot cause the movement of USD prices,” the study said. “More so, Euro prices can cause the movement of Bitcoin while Bitcoin prices cannot cause the movement of Euro prices.”

A one way correlation sounds curious, and correlation of course does not mean causation, but what was a lot more new in 2020 is the finding that there’s a relationship between bitcoin and geopolitics.

One of the first such study looked at the relationship between bitcoin and the GPR index of Caldara and Iacoviello (2018), an index that reflects the level of geopolitical risk by counting geopolitical events as reported in leading newspapers from around the globe.

“The occurrence of jumps in the GPR index significantly increases the likelihood of jumps in Bitcoin, suggesting that the jump behaviour of Bitcoin is dependent on the jump behaviour in the GPR index,” the study said in March 2020.

A July study of that year not only confirmed these findings, but went a lot further to state that bitcoin is actually a leading indicator of geopolitical risk.

“GPR can be positively affected by BCP, which suggests that the Bitcoin market is a leading indicator, when it comes to reflecting and providing contingency for the financial risks associated with the global geopolitical events,” it said.

A November study added more nuance, stating “there is a strong nexus between Bitcoin and the global geopolitical risk. To be more precise, the GPR determines whether Bitcoin acts as a safe haven, as a risky investment or as a normal investment.

When GPR is high, then Bitcoin is strongly linked with gold, US Treasury yields and negatively connected with the EUR/USD exchange rate. Moreover, the appearance of Bitcoin price bubbles is more likely to take place.”

Closing that 2020, a study found that bitcoin is actually an efficient market. They state:

“According to the data and tests carried out, it can be seen that the efficiency of the cryptocurrency market is strong, since the last past values justify its net present value, and that the price balance occurs in a lag of only 60 minutes.”

Finally, again in that 2020, ethereum was found to be a hedge against gold and stocks, while another study found it too acts as a diversifier increasing risk adjusted returns. This latter study was also one of the first to suggest higher allocation than 1%, in this case 8%.

Clarity in Confusion

Trustnodes has been asked a number of times to point to these studies, so we decided to catalogue them for easy reference, but we can’t miss the opportunity to add our own commentary.

Not least because none of these studies has much to say about inflation, yet an inflation hedge became one of the main narrative in the last bull.

As it turned out, the dollar strengthened during that inflation period and considerably. Although in theory this shouldn’t affect bitcoin significantly because if the euro weakens, then it should balance out, however bitcoin is currently at very uneven stages of adoption, and America is at the most advanced stages.

Likewise for geopolitical risk, for it to be noticed by bitcoin, it probably has to be in an economy of size like US, EU or China.

For other smaller economies, they still might affect bitcoin, but the price movements might not be sufficiently notable. Or at least this is how we can explain the lack of significant effects on bitcoin from the Russia-Ukraine geopolitical earthquake as it was at the time.

There were movements in February 2022, but not sustainable. Maybe because the Russian central bank managed to contain the Rubble collapse, or maybe because both Russia and Ukraine are too small for a global asset.

Where stock correlation is concerned, to some current observers the above studies might look out of date. A period of months however or even a year is not sufficient especially since many stock trading houses or market makers now do bitcoin as well and they might utilize the old habit of putting it in a high risk growth asset.

In theory however, bitcoin’s fundamental value probably comes from global commerce. It is growing in that utility, so no easy statement can be made, but once the market is saturated it should or might go up or down based on whether global commerce is increasing or decreasing, global growth.

That makes it a special asset due to it providing exposure to the entire globe, and eventually therefore there may be some correlation with global companies, although arguably none penetrates as fully as bitcoin.

The main conclusion from these studies however is that rather than a hedge, bitcoin is a diversifier. It’s an asset you might want exposure to because it is different from other assets as it is a bit like gold if it was still in coins, but digital and not legally mandated.

That makes it different from stocks because you can’t pay with stocks like you can with bitcoin, different from gold because it is digital and you can conveniently pay with it or transfer it without an intermediary, and different from commodities because you don’t quite consume it.

Arguably however it is not too different from fiat except that it is code money, especially in the case of ethereum.

Bitcoin can therefore act as any of these assets, but its different qualities give it a different value that largely makes it uncorrelated with any of them over the medium and long term.

What all of these assets do to some degree have in common however is that they all are also speculative instruments. Therefore at times fundamentals can be discarded, but usually that doesn’t last long as ultimately the supply and demand equation imposes itself.

With that view, these studies have concluded that bitcoin should be part of an investment portfolio, and with that conclusion they have changed the crypto world in as far as this is an asset that is now taken seriously in finance among those that have the power to make decisions regarding investments.

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