In general, Bitcoin (BTC) has always been considered as a non-correlated asset in the market. Its price was usually guided by other forces that traditional markets did not follow. However, in a recent report shared by The Wall Street Journal (WSJ) Bitcoin is becoming more correlated to assets such as Gold.
In order to understand this shift in Bitcoin’s correlation, the WSJ provides a few reasons why this might be happening. There are two main things affecting Bitcoin’s price. The first thing to say is that Bitcoin is becoming an increasingly mainstream asset due to larger investments from institutional funding and venture capitalists (VC).
Although there might be a stronger relationship between Bitcoin’s price and other assets’ prices, volatility remains a key feature of the most popular virtual currency in the space.
In general, there are several individuals and analysts that believe that Bitcoin is a safe haven investment. If traditional markets fall, Bitcoin remains stable. In general, gold and other precious metals have been the most popular safe haven assets and investments for investors that wanted to avoid volatility in the cryptocurrency market.
During the last years, Bitcoin entered the market as a new and innovative way to store funds. Several analysts called it digital gold because of its limited supply and other characteristics. Since it was created, Bitcoin never experienced a financial crisis such as the one in 2008, but experts believed that it might be possible for the digital asset to become digital gold in the future.
According to the WSJ, Bitcoin has a correlation with gold close to 0.84. That means that the asset is very correlated to the most popular virtual currency. In general, a 0.84 can be considered a correlation.
The Excalibur Pro Inc., the firm that conducted this investigation, shows that Bitcoin also has a 0.77 correlation with the Chicago Board Options Exchange’s VIX index, that measures market volatility. These numbers represent the correlation these assets had during the last few days.
The scale for establishing a perfect or inverted correlation goes from -1 to 1 where -1 means an inverted correlation while +1 shows a perfect correlation between two variables.
As per the report, Bitcoin is experiencing an increased influx of investment from institutions and venture capital firms. For example, Fidelity Investments announced a new institutional platform and service.
Furthermore, Grayscale has also been investing in virtual currencies, including Ethereum (ETH), Bitcoin and others such as Litecoin (LTC) or XRP. At the moment, the company has around $900 million in funds under management.
In addition to it, venture capital investments in the market have also helped Bitcoin have a better correlation with other assets such as gold. According to the WSJ, back in 2013, VC investments in the crypto space were close to $96 million but skyrocketing up to $2 billion at the end of 2017. The report did not provide information about 2018.
Institutions will be playing an important role in the space in the near future. More companies will be entering the market with the help of recognized firms launching institutional-grade products. For example, the Intercontinental Exchange (ICE) is going to launch its platform for institutions known as Bakkt.
Furthermore, the U.S. Securities and Exchange Commission (SEC) could soon approve a Bitcoin Exchange-Traded Fund (ETF).