When Wall Street defends cryptocurrencies, it talks a lot about the benefits of diversification. But when financial markets fall, Bitcoin has an embarrassing habit: it tends to follow the market.
Bitcoin fell as much as 11% on Monday. Correlation analysis showsThere is a high degree of consistency between the US stock market and Bitcoin, and the correlation between the two is the highest in a year.
One explanation is that Bitcoin remains a highly volatile investment target, meaning that when investors start to reduce the risk of their portfolios, they start selling cryptocurrencies.
Vijay Ayyar, Asia-Pacific head of the cryptocurrency exchange Luno in Singapore, said the background to the current major news events explains why bitcoin and stocks are more closely linked. 'There is some uncertainty in the market given that the Fed is about to meet to discuss undersized monetary stimulus,'he said.
Other analysts say Bitcoin could reflect a change in risk appetite as it becomes easier for professionals to invest in cryptocurrencies through futures exchanges and exchange traded funds (ETF). In July, when the s & p 500 fell more than 2% in a single day, bitcoin fell about 6% in two days.
Indeed, academic research shows that Bitcoin can promote portfolio diversification. Research from the University of Bath found that having some cryptocurrency exposure is good for portfolios.
Some cryptocurrency proponents believe that the reason for the high volatility is that the cryptocurrency is also a very new asset. They believe that Bitcoin will be widely accepted and will eventually receive more institutional investment, which will stabilize prices and make it more like an alternative hedging product.
Still, there is a long-running debate about the rationale behind the cryptocurrency. Is it a risky asset or a safe haven asset? Is it an inflation hedge or a symbol of excessive speculation?
Despite the volatility, the idea that Bitcoin could be an alternative to cash and gold has a big impact. Last week, billionaire Dario said he owned some bitcoins, saying that "all cash alternatives are worth considering."