The Studies That Turned Bitcoin into an Asset Class – Trustnodes

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Many studies have little effect except at the edges, but some studies change the world, in this case the bitcoin world.

Amid stained coverage in mainstream media and think tanks, it was universities that came to the rescue of bitcoin with one of the first papers to investigate its relationship to other assets concluding that there is no correlation.

“Bitcoin Has No Correlation to the Dow Jones, Nikkei 225, Gold or Oil Finds New Study,” we reported in February 2018.

This was done by Stockholm University from November 2013 to February 2017. It concluded that bitcoin is very useful for diversification in line with modern portfolio theory.

Another study conducted simultaneously, covering the period from September 2015 to December 29, 2017, found that there was only a week or no correlation between cryptos and fiat pairs, but some seem to be more correlated than d. ‘others.

This did not cover the dollar, but it did suggest that there appears to be an inverse correlation relationship between bitcoin and the pound, the Canadian dollar, which generally acts like the USD, as well as bitcoin and the yuan.

When academia talks, people tend to listen, so things can move quickly. In April of that year, a study indicated that bitcoin was becoming a regular market, like forex:

“Despite its virtual nature and novelty, the Bitcoin market has recently and rapidly developed the statistical characteristics that are empirically observed for all mature markets like stocks, commodities or Forex.”

In August 2018, researchers at York University in Toronto found that bitcoin outperforms gold, stating:

“We find that it is possible for an investor to replace gold with bitcoin in an investment portfolio and achieve a higher risk-adjusted return.”

There were other studies largely confirming all of these findings with respect to asset correlations, fiat correlations, and even gold substitution which later gave rise to inflation hedging theory.

However, many of these studies found that bitcoin is not a good hedge, except perhaps for fiat, because it has no correlation or low correlation – which we take to mean for some time. time.

Instead, they all concluded, at least the ones we saw, that bitcoin is very useful as a diversifier with its addition to a portfolio offering higher risk-adjusted returns.

In 2018, these studies suggested that 1% of a portfolio should be allocated to bitcoin, but later they started recommending 10%.

Indeed, as recently as 2021, after which we stopped prioritizing these studies because a consensus seems to have been reached, a paper from the University of Warsaw confirmed that bitcoin is uncorrelated and that “the wallets that include bitcoin outperform those made up of just traditional assets.” .”

Relevant for today, a 2020 study which again confirms that there is no correlation between bitcoin and stocks, also found that movements in interest rates are much more predictive of stock prices. than bitcoin.

2019 may have proven it, although bitcoin ended that year doubling, but another study from the end of 2020 found that the dollar affects BTC.

“USD prices can cause Bitcoin price movement, while Bitcoin prices cannot cause USD price movement,” the study states. “More so, Euro prices can cause the movement of Bitcoin while Bitcoin prices cannot cause the movement of Euro prices.”

A one-way correlation seems curious, and correlation of course does not mean causation, but what was much newer in 2020 was the discovery that there is a relationship between bitcoin and geopolitics.

One of the first such studies examined the relationship between bitcoin and Caldara and Iacoviello’s (2018) GPR index, an index that reflects the level of geopolitical risk by counting geopolitical events as reported in major newspapers. of the whole world.

“The occurrence of jumps in the GPR index significantly increases the likelihood of jumps in Bitcoin, suggesting that the jumping behavior of Bitcoin depends on the jumping behavior in the GPR index,” the study said in March 2020. .

A study from July of that year not only confirmed these findings, but went much further by claiming that bitcoin is actually a leading indicator of geopolitical risk.

“GPR can be positively affected by BCP, suggesting that the Bitcoin market is a leading indicator, when it comes to reflecting and forecasting financial risks associated with global geopolitical events,” he said. .

A November study added more nuance, stating “there is a strong link between Bitcoin and global geopolitical risk. To be more specific, the GPR determines whether Bitcoin acts as a safe haven, a risky investment, or a normal investment.

When the GPR is high, Bitcoin is strongly tied to gold, US Treasury yields, and negatively tied to the EUR/USD exchange rate. Moreover, the appearance of Bitcoin price bubbles is more likely to occur.

Closing out this year 2020, a study revealed that bitcoin is actually an efficient market. They declare:

“According to the data and the tests carried out, it is found that the efficiency of the cryptocurrency market is strong, since the last past values ​​justify its net present value, and that the price equilibrium occurs in a lag of only 60 minutes.”

Finally, again in 2020, Ethereum proved to be a hedge against gold and stocks, while another study found that it also acted as a diversifier increasing risk-adjusted returns. This latest study was also one of the first to suggest an allowance above 1%, in this case 8%.

Clarity in confusion

Trustnodes has been repeatedly asked to point to these studies, so we’ve decided to catalog them for easy reference, but we can’t miss the opportunity to add our own commentary.

Not least because none of these studies have much to say about inflation, but an inflation hedge has become one of the main narratives of the latest bull.

It turned out that the dollar strengthened during this period of inflation and considerably. Although in theory this shouldn’t affect bitcoin significantly because if the euro weakens then it should balance out, but bitcoin is currently at very uneven stages of adoption and America is in the most advanced stages.

Similarly for geopolitical risk, for it to be noticed by bitcoin, it probably needs to be in a big economy like the US, EU or China.

For other small economies, they might still affect bitcoin, but the price moves might not be notable enough. Or at least, that’s how we can explain the lack of significant effects on bitcoin from the geopolitical earthquake between Russia and Ukraine as it was at the time.

There were movements in February 2022, but not sustainable. Maybe because the Russian central bank managed to contain the collapse of Rubble, or maybe because Russia and Ukraine are too small for a global asset.

As far as stock correlation is concerned, to some current observers the above studies might seem outdated. However, a period of several months or even a year is not enough, especially since many stock trading companies or market makers are now also doing bitcoin and they could use the old habit of placing it in a high-risk growth asset.

In theory though, bitcoin’s fundamental value likely comes from global trade. It increases in this utility, so no easy statements can be made, but once the market is saturated, it should or could increase or decrease depending on whether global trade increases or decreases, global growth.

This makes it a particular asset as it offers exposure to the whole world, and so there may possibly be some correlation with global companies, although arguably none penetrate as fully as bitcoin.

The main conclusion of these studies, however, is that rather than a hedge, bitcoin is a diversifier. It is an asset that you may want to gain exposure to as it is different from other assets as it looks a bit like gold if still in coins, but digital and not legally mandated.

This makes it different from stocks because you can’t pay with stocks like you can with bitcoin, different from gold because it’s digital and you can easily pay with it or transfer it without an intermediary, and different from commodities because you don’t quite consume it.

However, it’s arguably not too different from fiat except that it’s encoded money, especially in the case of Ethereum.

Bitcoin can therefore act like any of these assets, but its different qualities give it a different value that makes it largely uncorrelated to any of them over the medium to long term.

However, what all of these assets have in common to some extent is that they are all speculative instruments as well. As a result, the fundamentals can sometimes get pushed aside, but that usually doesn’t last long because, ultimately, the supply and demand equation imposes itself.

With this in mind, these studies concluded that bitcoin should be part of an investment portfolio, and with this conclusion, they changed the world of crypto in that it is an asset now taken to heart. serious about finance among those who have the power to make investment decisions.

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