Bitcoin as Uncorrelated Growth Asset

Given that Bitcoin is currently a growth investment asset, we must examine its merit in the context of an overall portfolio. The most popular method is to look at the correlation between its price movement and the price movements of other popular investments. The goal, which is based on the Modern Portfolio Theory of Nobel Prize–winning economist Harry Markowitz¹⁴¹ and others, is to find assets that have attractive potential rates of return and whose returns are not correlated with other assets in the overall portfolio. Creating a portfolio in this manner reduces the probability that all the assets in the portfolio will lose value at the same time.

For this analysis I will use U.S. stocks (represented by the S&P 500 index), non-U.S. developed market stocks (represented by the MSCI EAFE index), emerging market stocks (represented by the MSCI EM index), bonds (represented by the Barclays Capital US Aggregate Bond Index), and gold. Each of these asset classes represents trillions of dollars in market value, and all are likely to feature prominently in the portfolio of a well-diversified investor. The investment industry standard is to use monthly data, and I will do that here with price data downloaded from Bloomberg. Since Bloomberg’s reliable data set for Bitcoin begins on June 30, 2011, I will start there.

Figure 10 is a matrix of the correlations between the returns of these various asset classes. For any two assets, a correlation of 100% means their investment returns move together in lock-stop, a correlation of zero means they move independently with no apparent relation to each other, and a correlation of -100% means they move in opposite directions.