As investors seek ways to harness Bitcoin’s volatile and often unpredictable nature, BlackRock argues that Bitcoin’s prices may be uncorrelated to stocks and other traditional assets in a new report. The authors call Bitcoin a “unique diversifier” because its behavior is difficult to analyze within traditional economic frameworks.
While Bitcoin prices may correlate with established markers like the S&P 500 in the short-term, the report says, they often rally higher than others over time. “We view this pattern as instances of fundamentals eventually prevailing over short-term leveraged trading reactions,” the report said.
Iván Rodríguez, an associate professor of finance at Eastern Michigan University, has come to a similar conclusion in his own research. “There are periods where the correlation seems to be really high and these periods where these correlations kind of decouple, like the correlation disappears, or it’s negative,” he said. “So when you look over the long-term it seems like they’re uncorrelated.”
Rodríguez points to a concept called intermarket flows to explain why Bitcoin and other traditional assets tend to correlate in the short-term. During times of volatility, an investor might choose to sell S&P 500 and invest in Bitcoin or vice versa. “So it can induce a negative correlation. It can induce a positive correlation,” Rodríguez said. “But those decisions that I’m making, or the market’s making on aggregate, that’s going to drive prices.”
As its proponents like to point out,, Bitcoin is decentralized, open-source and detached from fiat-currencies and major geopolitical risks. Because of this, the BlackRock report says, some investors have embraced it as a “flight to safety” over the last five years. This means it is viewed as a safe bet amid times of political and economic instability, similar to gold.
“When we think about Bitcoin, we think about primarily as an emerging global monetary alternative,” Robert Mitchnick, BlackRock’s head of digital assets and one of the report’s authors, said in an interview with Bloomberg on Tuesday.
As concerns over the U.S. national debt rise, Bitcoin becomes an attractive, alternative reserve asset, detached from the value of the U.S. dollar. BlackRock’s report claims that because of this, Bitcoin can be valuable in helping investors diversify their portfolios.
“I think people are taking that idea to heart, and they are investing in Bitcoin to safeguard their money,” said Rodríguez, the Michigan professor. But, he cautions investors against overestimating Bitcoin’s diversification power.
“I do think, from a diversification point of view, for example, because they are related fundamentally, because investors are investing both in that and in the stock market, it’s not going to have as good of a diversification effect as the authors’ claim,” Rodríguez added.
At the moment, cryptocurrencies and other assets are showing high correlation. A recent Bloomberg study reported that the largest one hundred digital assets and the S&P 500 have been fluctuating together at a level only exceeded once before, in 2022. This could, of course, change based on new developments in the world.
“Over the long term, bitcoin’s adoption trajectory is likely to be driven by the degree to which concerns rise and fall over global monetary instability, geopolitical disharmony, U.S. fiscal sustainability and U.S. political stability,” the report said.
BlackRock’s Bitcoin Exchange-Traded Funds
The new BlackRock report comes at a time when the world’s biggest asset manager has moved into digital assets in a major way following a shift in the regulatory environment. BlackRock became one of around a dozen firms offering Bitcoin exchange-traded funds earlier this year, an unprecedented step for both the company and the stock market.
An ETF is usually a collection of stocks, bonds or other assets that can be listed as shares on a major exchange. In the case of Bitcoin, ETFs are a way to package cryptocurrencies and offer them on the stock market, making them accessible to a broader group of people.
BlackRock’s Bitcoin ETF is known as iShares Bitcoin Trust, or IBIT. Today, IBIT has $22 billion in assets under management and is trading at $36. The ETF reached its highest volume in mid March, almost hitting $4 billion before settling around $1.5 billion.
All of this suggests how Bitcoin is becoming an integral part of BlackRock’s business, and why understanding its complex cycles will be important in coming years. In June, BlackRock CEO Larry Fink said that Bitcoin is “digitizing gold.”
