Crypto: Not So Uncorrelated After All, Says Morningstar

Bitcoin and other virtual currencies hew more closely to stocks in downdrafts, a study finds.

Bitcoin and its ilk are sometimes known as “digital gold” because, to their many admirers, they promise both riches and lack of correlation to stocks.  Turns out, though, that the cyber currencies sync up more closely during down equity markets and their aftermaths.

That’s the conclusion from a study by Amy Arnott, portfolio strategist with research firm Morningstar.

Crypto typically has a low correlation to stocks and other traditional asset classes, Arnott writes. Trouble is, when stocks go south, crypto tends to go along with them. In 2020, the correlations between the top two cryptocurrencies—Bitcoin and Ethereum—and Morningstar’s equity index reached as high as 0.75.

Perfect correlation is 1.0. The Morningstar paper notes that, back then, “major cryptocurrencies lived up to the maxim that all correlations go to 1.0 in a bear market.” 

Consider the market crash from February 19, 2020, through March 23, 2020, when Bitcoin dropped by 38%. During that time, the S&P 500 fell 34%. And this year’s rocky investing environment shows similar results. The S&P 500 is off 6.4% and Bitcoin is down 11%. Meanwhile, gold is up 8.6% in 2022.

Here’s an irony: Despite its much-touted resemblance to gold, a classic refuge asset, Bitcoin’s performance has been far different from the yellow metal’s. Over a three-year period, Morningstar says, the Bitcoin-gold correlation was just 0.08.

Morningstar also points out that crypto’s wild volatility is sometimes tough to stomach. “While cryptocurrency has an unusually low correlation with traditional asset classes, its volatility makes it tough to use in a diversified portfolio,” the report says. 

Crypto’s trouble zigging while other assets zagged is a recent and rising concern among investors. Earlier this year, an International Monetary Fund report warned of an increasing interconnection between crypto and other assets, especially in emerging market nations.

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