BlackRock Report Adds Fuel to Bitcoin Price Correlations Debate, Calling It ‘Unique Diversifier’

While Bitcoin prices may correlate with established benchmarks such as the S&P 500 in the short term, the report said, they often rise more than others over time. “We view this pattern as cases of fundamentals ultimately prevailing over short-term leveraged trading reactions,” the report said.

Iván Rodríguez, associate professor of finance at Eastern Michigan University, reached a similar conclusion in his own research. “There are periods where the correlation seems to be really high and these periods where these correlations decouple, like the correlation disappears, or it’s negative,” he said. “So when you look at the long term, they don’t seem to be correlated.”

Rodríguez points to a concept called intermarket flows to explain why Bitcoin and other traditional assets tend to correlate in the short term. During periods of volatility, an investor may choose to sell the S&P 500 and invest in Bitcoin or vice versa. “So it can induce a negative correlation. It can induce a positive correlation,” said Rodríguez. “But those decisions that I make, or that the market as a whole makes, will determine the prices.”

As its proponents like to point out, Bitcoin is decentralized, open-source, and detached from fiat currencies and major geopolitical risks. For this reason, the BlackRock report says, some investors have embraced it as a “flight to safety” over the past five years. This means it is seen as a safe bet in times of political and economic instability, similar to gold.

“When we think of Bitcoin, we think primarily of an emerging global monetary alternative,” Robert Mitchnick, BlackRock’s head of digital assets and one of the report’s authors, said in an interview with Bloomberg on Tuesday.

As concerns about the US national debt grow, Bitcoin is becoming an attractive alternative reserve asset, detached from the value of the US dollar. The BlackRock report argues that because of this, Bitcoin can be valuable in helping investors diversify their portfolios.

“I think people are taking this idea to heart and investing in Bitcoin to protect their money,” said Rodríguez, the Michigan professor. But, he warns investors not to overestimate Bitcoin’s diversification power.

“I think that from a diversification point of view, for example, because they are fundamentally linked, because investors invest both in this and in the stock market, it will not have as good a diversification effect as the authors claim. Rodríguez added.

Right now, cryptocurrencies and other assets are highly correlated. A recent Bloomberg study reported that the hundred largest digital assets and the S&P 500 have fluctuated together at a level exceeded only once before, in 2022. This could, of course, change based on new developments in the world.

“Over the long term, the trajectory of bitcoin adoption will likely be determined by the degree to which concerns wax and wane about global monetary instability, geopolitical disharmony, US fiscal sustainability, and US political stability,” the report said.

BlackRock’s Bitcoin Exchange Traded Funds

BlackRock’s new report comes as the world’s largest asset manager has moved into digital assets in a major way following a shift in the regulatory environment. BlackRock became one of about ten firms to offer Bitcoin exchange-traded funds earlier this year, an unprecedented step for both the company and the exchange.

An ETF is typically a collection of stocks, bonds, or other assets that can be listed as stocks on a major exchange. In the case of Bitcoin, ETFs are a way to package cryptocurrencies and offer them on an exchange, making them accessible to a wider group of people.

BlackRock’s Bitcoin ETF is known as the iShares Bitcoin Trust, or IBIT. Today, IBIT has $22 billion in assets under management and trades at $36. The ETF peaked in mid-March, nearly hitting $4 billion, before settling around $1.5 billion.

All of this suggests how Bitcoin is becoming an integral part of BlackRock’s business and why understanding its complex cycles will be important in the coming years. In June, BlackRock CEO Larry Fink said that Bitcoin is “digitizing gold.”