"The Bitcoin Correlation"
One of the most commonly repeated notions on Wall Street these days is that “Bitcoin” has become “correlated” with moves in the stock market.
This article will discuss this alleged “correlation” and what I believe it means for both stocks and cryptocurrencies for the remainder of 2022.
Lately it seems investors have two questions on their mind related to their concern about inflation and interest rates: “Do I want to invest in stocks or crypto?” and “What about the correlation that Bitcoin seems to have developed to stocks?”
The short answers, in my opinion, are:
- 1- own both stocks and crypto here – at least for a while – as I believe both are breaking back to the upside as Q1 of 2022 winds down.
- 2- own crypto for far longer than this year. For as we get further out into the calendar year, I expect these two asset classes to go totally separate ways.
And that brings us to this notion of “correlation” between stocks and Bitcoin, to which my short answer is:
- Bitcoin has about as much correlation to stocks as it does to a coin flip or the weather.
Correlation is a tricky concept, and it is widely misused and misinterpreted in the stock market. I’ll explain why this correlation “meme” of the moment is not unlike the buzz phrase “crypto winter,” which has been picked up and applied without cause to cryptocurrencies here as well in early 2022.
But first, a little history.
I’ve been in markets for a long time. And one thing I’ve learned is that the biggest gains come from getting the biggest picture right.
There are significant turning points in markets at least once a decade, and at those turning points there will always be people to tell investors that “The End Of The World As We Know It” (TEOTWAWKI) is at hand. And there will also always be the opposite – people who will insist that short term trends of the moment will go on forever.
More often than not, investors are rewarded for ignoring both camps.
2001 and 2009 were two such “Big Picture” moments for investors – moments when forces similar to what I’m seeing here in 2022 were in play.
In the first case, after the “dotcom” implosion of Y2K, there were very strong arguments suggesting that the technology bubble had popped permanently. The collapse of the “eyeball” theory of valuation supposedly meant that the promise of the internet was false and would exit the world as a depleted fad, like hula hoops or pet rocks. One economist, who went on to win the Nobel Prize, actually said that he did not think the internet would ever play a meaningful role in world commerce...
I felt then that investors should use the opportunity to buy companies that survived the implosion, and that not only was the internet not dead, but that it would expand exponentially into every corner of our lives.
In 2009, after the “financial crisis,” similar arguments suggested that financials and real estate were now in a Dark Age that would take generations to recover from, and specifically that this implosion would cause the Baby Boom generation to abandon stocks just as its retirement years were approaching.
I felt that the Boomer generation, which had fueled the largest demographic participation in the stock market in history, would not only not abandon stocks, but that it would actually increase its participation, even in retirement, with the lure of online investing only gaining strength over time.
I bring up these key moments because, as I said, I believe we are at another similar turning point in market history, or are at least approaching one here in 2022.
I got in trouble in some commentary circles back in those years around Y2K for suggesting in my newsletter 21 Forward that the Grand Bull Market would go on well into the first decades of the 21st century. Part of this was based on my interpretation of Elliott Wave theory which pitted me against the more vocal practitioners of that discipline at the time who had been calling for the end of the Grand Bull since the crash of 1987.
I suggested that two authors being ridiculed at the time for publishing a book calling for Dow 30,000 were far closer to the truth of what should be expected from stocks than the TEOTWAWKI doomsters. And my opinion was laughed at as well.
But my Elliot Wave analysis turned out to be correct, and it is at least partly why I believe 2022 is shaping up as a very important turning point in markets as well.
For, here in 2022 we find ourselves in the midst of yet another grand historical development that has attracted the same kind of extreme naysayers and supporters alike as the internet phenomenon in the late 90’s did.
I refer to cryptocurrencies, or what most people generically call “Bitcoin.” So let me be clear and state emphatically:
Bitcoin is not just a once in a generation development. It is a once in human economic history development.
For, it bears the seeds of an entirely new form of monetary exchange between people. And its relationship to fiat currency has all the makings of a change as great in human history as the leap from bartering to coinage.
I won’t go into the technical underpinnings of blockchain and why they’ll prevail over current forms of transaction, but suffice it to say that the advantages of digital currency for human interaction are as profound a development in history as the creation of the internet and the online world in 1990’s.
There will be no stopping the transition to digital currency despite the best efforts of the “TradFi” crowd and government representatives who are appearing more and more desperate in their opposition to this progress even as they see the writing on the wall – which rightly calls attention to the hollowness of the current fiat world where theory suggests that value is but a concept that can be willed, conjured, or printed into existence.
This notion is, of course, utterly false even though it has taken decades to be exposed as such, and it is actually the subliminal basis for much of the tension between different strata of societies around the globe at the moment.
People innately know that value is not something to be changed by government decree, that it is a fundamental concept of truth that ultimately finds its way to the surface throughout human history in all interaction between peoples.
And here at the start of the 21st century, value is increasingly a concept being examined and found wanting in the day-to-day transactions that make up our experience as members of society.
Governments are at least partially responsible for this dissonance. The gap between the ideals of political discourse and reality in the streets have become frayed, to say the least. And part of government’s frayed connection to its citizens has to do with the value of its currencies.
Ever since the US Dollar was removed from the Gold standard by Richard Nixon in the 1970’s, the value of the world’s so-called “reserve currency” has plummeted, as has people’s belief in the concept of the “full faith and credit” of the pieces of paper they carry around in wallets.
Why is this?
Ultimately because we keep borrowing against our so-called “reserve” of Dollars. And when we run out of Dollars to borrow (and spend…), as the government now does every year, what do we do? We just create more “money” by saying we have created more.
Is it any wonder that people are left with the sinking feeling that something about this doesn’t add up…? That somehow there must be an actual value to things that isn’t being accounted for…?
This is where Bitcoin enters the equation.
Bitcoin was created right after the “financial crisis” of 2008-09, when the "banksters" of Wall Street nearly brought down the world’s systems for investment and transaction by creating instruments that had purported value, but in the end turned out to have only conjured “value.”
These instruments were packages of debt that were passed around in a very real Ponzi scheme until the last buyers – sometimes the central banks of entire countries – were left holding the empty bag.
And alas, what was the solution offered to save us all…?
Printing more money...
The system beneath Bitcoin saw right through this“solution,” rightly perceiving it as just another extension of the Ponzi scheme of government debt. (Ironic, of course, that the current objections to Bitcoin often mischaracterize it as a Ponzi scheme…)
The main concept to grasp about Bitcoin is that it is based on equity, not debt.
There can only and forever be a limited amount of Bitcoin – 21million to be exact. No more, no less. And that is a measure called equity. It cannot be extended infinitely on the whims of politicians.
Although this seems like a generalization, it is the reason that crypto will emerge as the new standard bearer of value that will gain its footing independently of governments and their fiat decrees.
For, unlike the Dollar, or other governments’ fiat currencies, the concept of value for Bitcoin is based on math that reconciles in the end – the way that budgets based on fiat no longer do.
And so, here in 2022, even as Bitcoin has made its way into the public consciousness enough to find the short term commentators and analysts who make a living from what they call “news” attaching their cliches and buzz phrases like “crypto winter” to it, and now claiming that it is “correlated with the moves of the stock market,” investors have one of those opportunities to see through the trees to the forest.
Bitcoin – or more accurately, cryptocurrency – is not only not correlated with the stock market and all its “news,” but rather it has entered into a correction in price during one Quarter of one year of its 14-year existence coincidentally at the same time that stocks have also taken a breather.
And it may move in what will continue to be called “correlation” for a short time more this year.
But long term, the correlation is less than 50/50.
Much, as I said at the top, like the weather, or a flip of a coin.
(In fact, the highest this correlation has ever been is the reading from this coincidental Quarter here at the start of 2022, and that number is 0.6, just over the 50/50 level. At other times in its history, the correlation has been as low as 0.01. )
“Crypto winter,” “correlation,” “Ponzi scheme,” “money laundering” – these are all buzz phrases of “the news,” designed to capture attention for 7-minute attention spans between commercials…
But the Big Picture – the relevant one for the investor looking to be on the right side of the coming Big Move of our current time – is, in my opinion, this:
The stock market is approaching a final wave up in the Grand Bull Market. And it will be followed by a Bear market that could last several years and do a decade’s worth of damage to stock portfolios. Whereas Bitcoin is just getting started.
As stocks top out later this year, my expectation is that cryptocurrencies will assume a leadership role in the next wave of the history of investment and price discovery.
And as with all waves of historical dimension, crypto’s pricing, and re-pricing, of both goods and services will go in search of true value – the kind that eventually correlates with the goods and services that survive the transition.
It will be a complex transition. And a large one. The kind that it will behoove investors to get out ahead of despite the calls of the short term TEOTWAWKI crowd.
2022 will be much like Y2K. And 2009.
Filled with crisis. And opportunity.
And as I said at the top, one of the most important lessons I’ve learned over a long period of time is that the biggest turning points in markets are ironically sometimes the hardest for most investors to see.
The transition to blockchain – which the public calls “Bitcoin” at this moment in time – is not only worth seeing, it is worth investing in if one believes in investing in the future.
And as stocks find their way to the next major high in 2022, investors looking to continue adding value to their portfolios might want to look toward this world that is still foreign to most – the world of Bitcoin and cryptocurrency. Done responsibly, and with an eye on risk control, RLCM believes that a small allocation to these assets might be appropriate now and in the future for an investor's speculative portion of a portfolio.
Richard Lees and RLCM clients may be long cryptocurrencies mentioned in this article. Clients invested in any of the 21 Forward 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:
