2018-8-18 20:22 |
Bitcoin’s Non-Correlation With The Traditional Market Can Put Investors At Risk
Many new investors believe that Bitcoin has a strong (or, at least, a moderate) correlation with the traditional financial markets. However, that is far from being the truth of how Bitcoin actually works and, unfortunately, it is leading many investors down the wrong path when they are building their cryptocurrency portfolio.
There is plenty of discussion about how cryptocurrencies work and whether they are related to the financial market or not and in which ways that relation could exist. At the moment, there is no definitive answer, you can be sure of this, but there are some strong indications that the whole crypto market is its own thing, mostly.
While plenty of financial gurus and investors suggest that a good portfolio would have only a fractional amount of cryptos in it, some suggest only 2% and others, 6%. This would mostly happen because there is a logic at practice here. The logic would state that a portfolio should have a small percentage of highly risky investments.
Cryptocurrencies can, surely, be considered risky investments. However how uncorrelated to the financial market remains to be seen yet. However, you should also see that the market has lost almost $830 billion USD in market capitalization recently, which is a big number.
Non-correlation Is Not Inverse CorrelationWe all know that the crypto market is in a bad shape right now. However, there is one issue of understatement that is hurting the portfolio of many investors. The reality is that many people assume that non-correlation means inverse correlation.
According to a recent interview with Matt Hougan, the vice president of Bitwise Asset Management Inc, there is simply no guarantee that when the financial market goes down, the crypto market will go up, unlike many people believe.
Hougan defends that, in the long-term scenario, the fundamental drivers of the crypto market are different from the other markets, so the low correlation between the two markets will continue to exist for a long time.
The main problem is that many amateur crypto investors simply correlate the market inversely. They believe that a fiat currency crisis or even the tariff war can have a positive impact on the crypto scenario when the truth is that it does not, according to Hougan.
A recent study also shows that, when you make a scale between 1 and -1, Bitcoin hardly moves away from 0,5. This means that the price is not very linked to real-world events.
About Altcoins and InstabilityThe main problem is that a diverse crypto portfolio would have been spectacular during 2017… but not today. During 2018, this strategy would have been considerably less beneficial, especially if you only invest in cryptocurrencies, which would mean that there is a great possibility that you would have lost a high quantity of money in 2018.
In fact, the Bitcoin price is still highly correlated with the price of other altcoins. This is why most altcoins are reaching yearly lows as Bitcoin does the same. The dominance of Bitcoin has been rising even as more and more tokens appear because the whole market is driven around it.
You should really consider whether now is the time to create a cryptocurrency portfolio. The market is very bad at the moment and it is not showing any sign that it will get any better in the near future. The future of many small altcoins is very uncertain and there is no reason why you will ever profit from them.
We are not affirming that the market is dead, but now is not a great time to invest unless you really believe in the potential of Bitcoin. In this case, you should buy and hold it for a long time because it looks like the bear market will continue for at least some months.
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