According to proponents, cryptocurrencies are an uncorrelated asset class that should contribute to portfolio diversification. But research shows that this claim doesn’t work particularly well.
We examined the relationship between where Bitcoin was mined and how local stock market performance correlated with Bitcoin’s price. We find that the prices are positively correlated over the last 5 years. Year.
We used the S&P 500, Hang Seng, and Shanghai Composite Indexes as regional proxies, as the United States and China have been where most of the Bitcoin mining has taken place over the past five years. Using weekly data, we calculated the nine-month consecutive correlation between Bitcoin returns and each of his three indices. We then compared it to the Bitcoin hash rate by country from September 2019 to January 2022. The Bitcoin Hash Rate is a metric that measures the computational power of the Bitcoin blockchain and indicates how well bitcoin mining is taking place. It is done.
Prior to November 2020, China accounted for over 60% of Bitcoin mining. Fast forward to November 2021, however, and China’s share plummeted to around 15% in response to government action to curb bitcoin mining. Over the same period, the United States rose from about 10% of global bitcoin mining to more than 35% of her.
Bitcoin hash rate distribution by country from September 2019 to January 2022
Bitcoin mining distribution by country 2019-2022
These trends make the November 2020-November 2021 timeframe an excellent opportunity to see how Bitcoin price and index correlations adjust as Bitcoin mining rises and falls. . He found that the correlation between Bitcoin and the S&P 500 rose from 0.28 to 0.39 as US crypto mining surged from November 2020 to November 2021. However, as cryptocurrency mining plummeted in China during the same period, the correlation between Bitcoin and his two Chinese indicators also fell. The Bitcoin correlation between Hang Seng and Shanghai Composite fell from 0.21 to -0.14 and from 0.09 to -0.44 respectively.
Correlation between Stock Indices and Bitcoin
The results suggest that the more Bitcoin mined in a particular country, the greater the correlation between cryptocurrencies and local stock markets. As bitcoin mining declines in a region, so does the correlation between bitcoin and the local stock market.
Regarding the year-to-year correlation between Bitcoin price and the index in question, our hypothesis fits there as well. The more bitcoin mined in a region, the greater the correlation between the bitcoin price and the local stock market. The relationship was strongest for the S&P 500 and Shanghai Composite, and less so for the Hang Seng Index over time.
Annual Correlations: Bitcoin and Stock Indices
Overall, our results show that where bitcoin is mined can affect how it moves and which stock indices it moves. influences what diversification benefits or not to the portfolio.
If you like this post don’t forget to subscribe enterprising investor.
All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect those of CFA Institute or the author’s employer.
Image credit: ©Getty Images/photonaj
Professional Learning for CFA Institute Members
Members of CFA Institute are empowered to self-determine and self-report the professional study (PL) credits earned, including: enterprising investorMembers can easily record credits using credits. Online PL Tracker.