Bitcoin’s Ebbing Correlations Boost Its Diversification Benefits

(Bloomberg) -- Bitcoin’s correlation with stocks and gold is declining as the token scales fresh peaks, bolstering arguments that cryptocurrencies offer portfolio diversification benefits.

The 90-day correlation of the S&P 500 index and Bitcoin has dropped to about 0.21 from a recent peak above 0.50 in October. A comparable measure for the token and bullion is near the lowest in about a year.

“In terms of Bitcoin, as well as other digital coins, versus other traditional risky asset classes, the diversification benefits remain intact,” said Benson Durham, head of quantitative global policy analytics at Cornerstone Macro LLC. He and colleague Roberto Perli last year said adding cryptocurrencies to an all-stock portfolio could temper volatility.

Bitcoin reached a new all-time high Tuesday just shy of $50,000 after rising fivefold over the past year. The token is notorious for wild price swings, but strategists are looking more closely at the potential for improving a portfolio’s risk-adjusted returns by adding Bitcoin and rivals like Ether.

Bitcoin can even lower the swings from a so-called minimum volatility all-stock portfolio, Durham said.

Diversification across digital assets also “makes good sense” since the average correlation among cryptocurrencies is dropping, he said. But Durham cautioned “there may be no place to hide” in any broad rout for digital coins.

Cryptocurrencies remain highly controversial, with some officials and strategists warning they are a magnet for speculators and exposed to risks such as regulatory tightening that could inflict big losses. Others see the dawn of a new asset class that is already rewarding early adopters handsomely.

©2021 Bloomberg L.P.