about 2 years ago • 1 min
Stocks have had a difficult start to 2022 as investors adjust their bets on how hard and fast the US Federal Reserve (the Fed) will cut the supply of cheap money. But unfortunately for those hoping crypto would diversify their portfolios, the sell-off has coincided with a surge in correlations between the two.
The not-so-secret secret to a balanced investment portfolio is to spread your money across a range of assets, so that any losses in one area are hopefully offset by gains elsewhere. This only works, however, if the assets you’re adding have low or negative correlation with your existing holdings.
The chart above shows bitcoin’s 30-day correlation with the S&P 500, a benchmark index of US stocks. For much of the OG cryptocurrency’s history, it did indeed show very little correlation with the US stock market – so adding bitcoin to a stock-heavy portfolio would be likely to increase your risk-adjusted returns.
But unfortunately for investors, correlations between bitcoin and stocks have surged since the coronavirus pandemic freaked out markets in February 2020 (indicated by the vertical blue line). Moves in the two are currently 67% correlated, up from nearer to zero in the six years leading up to the pandemic.
While correlations between crypto and stocks remain this elevated, you’ll have to look elsewhere for investments that add diversity to your portfolio.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.