TL;DR:

• Bitcoin (BTC) is known for its outsized returns and weak correlations with traditional assets.

• After COVID, the asset’s role as a portfolio diversifier started being questioned as monetary stimulus pushed BTC’s correlation with tech stocks higher.

• By analyzing the past 10 years of data, we show that recent monetary shocks, first the COVID stimulus and later the strongest tightening cycle in recent history, marked the period when the correlation between bitcoin and tech stayed higher than usual.

• This "COVID effect," lasting from March 2020 to late 2022, now seems to be something of the past, with bitcoin coming back to its “old normal” over the past year.

• As a result, we believe the case for bitcoin as a long-term portfolio diversification tool remains strong.

 

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When we talk to clients about adding a strategic bitcoin (BTC) allocation to their portfolios, the discussion isn’t just focused on the outstanding performance of the asset over the past ten years. 

One of the areas we always stress is bitcoin’s role as a portfolio diversifier given its historical weak correlation with traditional assets. With a crypto bull market taking shape, now is a good time to take a step back and better understand this dynamic, including where correlations might be going. 

 

Impact of the “COVID effect”

 

Four years have passed since the notable events of March 13, 2020. Bitcoin plummeted below $4,000 following a 39% crash triggered by COVID-19. This event occurred amidst a period of significant market turmoil, prompting unprecedented monetary stimulus measures by central banks globally. As a result of the massive stimulus, various assets—including bitcoin, gold, and equities—surged to record highs by the end of 2021.

As this dynamic unfolded, bitcoin’s long-lasting lack of correlation with traditional assets started being questioned. Both bitcoin believers and skeptics claimed that BTC’s price action was completely driven by monetary policy and global liquidity, making it highly correlated, for instance, with tech stocks. This claim was reinforced once US inflation hit a multi decade high above 9% in June of 2022 and the Federal Reserve responded with one of the most intense rate hikes in US history, further coupling bitcoin’s price to risk assets like tech stocks.

Fast-forward to 2024, and both bitcoin and tech stocks have not only regained their prior all-time highs, but started what seems to be a new period of price discovery. Does this mean the “COVID effect” continues today? 

We can start to answer this by analyzing the correlation between bitcoin and the Nasdaq 100 (as a proxy for tech stocks). We do this by computing 30-day rolling correlations between the two assets over the past 10 years, which includes both pre- and post-COVID eras. We employ the usual definition of moderate-to-very-strong correlations if they are greater than 0.40, and moderate-to-very-strong anticorrelations if they are smaller than -0.40. 

 

As Figure 1 shows, from the beginning of 2014 to March 13, 2020, BTC indeed had low correlations with the Nasdaq 100. When the COVID stimulus programs started, BTC and the Nasdaq 100 recovered fast from their respective drawdowns and moved in tandem until the former went above its 2017 all-time high. Correlations weakened in the first three quarters of 2021, notably during the China crypto ban—an event that shook crypto markets for a few weeks. As bitcoin steadily recovered to new highs in November 2021, the Nasdaq 100 also shot higher before reaching a peak shortly thereafter. 

A few months later, the Federal Reserve began quantitative tightening to fight inflation. For the remainder of 2022, correlations remained far higher than usual, fueling arguments by some that bitcoin performs like a tech stock. 

The beginning of 2023 was also the beginning of bitcoin’s recovery phase. This phase has been part of every cycle and lasts from when BTC reaches its multiyear low until it regains its prior all-time high. While both BTC and the Nasdaq 100 started new uptrends, correlation levels—with very few exceptions—came back to their “old normal,” suggesting that the COVID effect was something of the past. 

 

Monetary shocks drive correlation trends

 

If we compare bitcoin to gold using the same calculations, we find that periods of higher correlation between the two assets were far more localized, as reflected in Figure 2. Gold moved in consonance with its digital counterpart in three moments: (i) when monetary stimulus began in 2020, (ii) when real rates in the US got closer to positive territory in late 2022, and (iii) during the bankruptcy of the Silicon Valley Bank and the US regional banking crisis in March 2023, when gold and digital gold moved up in a clear flight-to-quality.

 

 

The conclusion we can draw from this analysis is clear: in the past 10 years, bitcoin only exhibited systematically stronger correlations with tech stocks following the two big monetary shocks that the world economy has lived through. First, during unprecedented monetary easing coming from COVID stimulus. Then, amidst the strongest monetary tightening cycle in recent history. 

While higher correlations with tech were the “new normal” for bitcoin from March 2020 to late 2022 and BTC and the Nasdaq 100 currently sit at new all-time highs, our analysis shows that the largest digital asset has only been in the moderate-to-strong correlation range with tech stocks in 10 of the past 262 days.

This exercise underscores why it’s important to zoom out and assess bitcoin’s behavior over longer time horizons. While market expectations project rate cuts by the Federal Reserve in the second semester of this year—which could momentarily recouple bitcoin back to tech stocks—the enormous success of bitcoin ETFs in the US, the forthcoming halving in April, and other drivers have created an environment for BTC to remain decoupled from tech and other traditional assets. Ultimately, we believe this helps make a strong case for bitcoin’s diversification benefits within long-term portfolios.


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