Ever since the spread of COVID-19, nation-states across the world have been at the end of a host of economic challenges. The usual investment tools used by people to hedge against economic risks noted a drastic fall in early-March, and this included all traditional asset classes. Even though Bitcoin and other cryptocurrencies’ inclusion as a new asset class irks many, its performance and lack of correlation with the traditional market makes its case.
However, the cryptocurrency asset class was not untouched by the 12 March fall, but was among the first ones to recover from its losses. As the crypto-market approached the fall, the correlation between Bitcoin and the S&P 500 was rising, whereas after the fall, BTC–Gold correlation was seen thriving. Despite the on and off correlation, there have been several narratives playing out at the same time, all of whom have historically had a big impact on digital asset prices, but may or may not be influencing price currently, according to Arca’s latest report.
Last year, when the value of the Chinese Yuan was slumping against the U.S Dollar, the Bitcoin market reacted to this with a subsequent rise and fall. However, in 2020, when a similar trend was being observed, the Bitcoin market remained unaffected. This could imply that the BTC market may not be directly impacted by the same events taking place in the traditional market year-over-year.
Bitcoin’s correlation with other digital assets also led to a collapse in the alt market, as BTC dumped in the market on 20 May. The speculation, one that was later proved false, caused a panic in the market and the reaction was similar to a stock falling after a 13-F filing showing a large investor dumping stocks.
Similarly, the continuous rise and fall in the value of Bitcoin in May, has welcomed numerous institutional investors via CME. However, the small-cap assets also reaped its benefits. Even though institutional investors chose the Bitcoin market, retail interest has been rushing into the small-cap digital assets class.
As per Arca’s report, last week when BTC fell by 12%, small-cap assets gained by 10%, a development that was inconsistent with historical data which suggested that altcoins gained only during bull markets. According to the Principal at Arca, David Nage, this randomness is common for an uncorrelated asset class. He added,
“Uncorrelated is great, but untethered is even better. And as I see it, digital assets are completely untethered to anything going on in traditional finance.”
Such developments are moving Bitcoin from an uncorrelated asset to a completely untethered class.