WELL, the so-called “Bitcoin Correlation” to stocks and bonds has finally seen the bottom drop out.
It has fallen below 0.5 in terms of the Nasdaq (i.e., growth stocks…), and as for Bonds, well, it’s once again Less Than Zero.
Anything below 0.5 basically calls correlation into doubt, and when it gets down toward zero – which is where Bitcoin has lived for most of its existence -- it means there is little to no relationship between the assets. When it goes negative, as it now is with Bonds, it means it is doing the opposite of what that asset is doing – i.e., it is going up when the asset goes down, and down when the asset goes up, thus in this case creating something of an interest rate hedge, if you will.
I'VE written about this before, and suggested that the “correlation” that market participants have been buzzing about for most of 2022 was, shall we say, less than convincing.
In fact, it was silly, and little more than the gossip game of “telephone talk” (which I guess needs to be renamed “meme talk” in our day and age…) that often overcomes Wall Street analysts and the financial news.
Some refer to this manic need to have something to talk about as “financial pornography,” in that it becomes a repetitive loop of disembodied observation that ultimately just desensitizes those who partake in it. But to those of us who have been around markets for more than a cycle or two, it is better known as “the way of the herd.”
But whatever one calls it, it behooves the investor who would profit over the long term to, at minimum, ignore it, and at maximum, take advantage of it.
AS an incidental aside, years ago when I edited and published my market newsletter 21 Forward, I became so intrigued with the ability of a word or a phrase to be glommed onto by the Wall Street herd that I devised a little experiment to prove my theory of market observation as gossip. I let some of my subscribers and friends in on the secret, and proceeded to plant an unlikely phrase in the garden of public discourse, and then sat back to watch how quickly and how far it would spread.
The word I chose had to be something that no one had theretofore used to describe a market climate. And since it was a lazy August, I came up with the word “tepid,” saying we were about to enter “a long, tepid summer.” Surely no one would describe a market that way of their own choosing…
But you guessed it, after one of the talking heads on the tube “news” parroted the phrase, as they used to enjoy doing to my work with impunity, it wasn’t long before Wall Street analysts, fund managers, economists, and even members of the Federal Reserve were suddenly referring to everything from stocks and bonds to currencies and commodities as being in a kind of “tepid,” range-bound market…
To this day, years later, I have to smile each time I see this word appear during any kind of pause in market trends, whether it be in print, on television, or even the newest gossip vehicle, You Tube.
Basically when you see or hear this word – or ones like “correlation” this year – a little alarm bell should go off in the back of your head to remind you to turn away from whatever it is that has captured your gaze because it is more than likely rehashed “telephone talk.”
ALL this by way of pointing to the discussion that quickly crept into the crypto universe this year when formerly fresh and interesting analysis of the new asset class turned from original thought to the cliches of Wall Street.
It is an axiom of market experience that in a Bear Market everything becomes correlated. This is because when fear overtakes the herd, the heat of adrenaline causes indiscriminate selling, often with no rhyme or reason save the feeling of “get me out!”
And indeed this is what happened in the first six months of this year when Wall Street was busy proclaiming “the worst six months in 50 years…!”
But it was so disappointing – at least for me – to see Bitcoin discussion, which had up until this year managed to sidestep Wall Street cliché, succumb to discussion of the “valuation multiples” of stocks, interest rates, inflation, and whatever else among the usual suspects had become the current curve fitted excuses for the why’s of buying and selling among investors.
For as I’ve said, crypto has nothing to do with stocks other than that is something that can be invested in – like gold or corn or pork bellies, or for that matter, sports. And just as commodities have a certain linked relationship to liquidity in the economy, there is a relationship to money that can be examined for crypto evaluation. But it is not one that can or should be labelled “correlation.” It is more like a pair of sporting events – say, baseball and football in the late Fall season – that might be playing out at the same time, but in fact have nothing to do with one another.
I do represent – and show – that Bitcoin has a relationship to Liquidity in the economy, as my pH-Liquidity Indicator defines it. After all, Bitcoin – and other cryptos like Ethereum – are, like it or not, now a part of the real world. And they are – at least at present – valued in Dollars.
But correlation? To stocks?
Not in the long run.
In fact, as the stock market finally tops out in the last gasp of the Great Bull Market – not off the lows of 2020, or 2009, or Y2K, but off the stock market’s very beginnings at the start of the 20th century – that is when I expect Bitcoin to not only show its lack of correlation with stocks for real, but to finally come into its own as the separately defined store of uninflated monetary value it was created to be.
And that is why RLCM believes it is prudent to allocate a portion of one’s investment portfolio to Bitcoin, and possibly other legitimate cryptocurrencies, here near the price lows of 2022 and going forward into a stock averse future that the herd will search long and hard to find some other “correlation” to.
Richard Lees and clients of Richard Lees Capital Management may be long cryptocurrencies mentioned in this article. Clients invested in any of RLCM's managed digital portfolios have undergone thorough risk evaluation to deem these investments appropriate for them, as should anyone considering speculative investments. A quick questionnaire about risk tolerance, like the one below, might shed light on such a tolerance: