There have been some interesting developments in the crypto market recently. As long-time readers probably know, we write market analysis posts every once in a while. This time around, we decided to focus on a topic that we haven't seen well covered in the mainstream media: the nature of BTC's correlation to equities.
Not too long ago, in 2018-2019, Bitcoin was virtually uncorrelated with equities. Its correlation oscillated between -0.2 and 0.3, frequently transitioning between positive and negative zones. This lack of correlation was a key factor in Bitcoin's appeal as a diversification tool. The primary investors in Bitcoin at that time were early adopters and retail investors, not the institutional investors who typically invest in the S&P 500. This explains the absence of correlation during these early years.
During the initial phase of the pandemic, there was a flight to liquidity, with investors selling off assets across the board to raise cash. This behavior caused simultaneous declines in both Bitcoin and equities, which were quite predictable. This also led the systems, which now evolved into the Algocrat AI portfolio, to have several very good months in a row. Basically, every time there is a 'fight or flight' event on the markets, there are good trending movements to capture significant profits.
However, even a few months after that, the correlation remained positive. Initially, this likely resulted from massive monetary stimulus measures by central banks around the world. Both the stock market and Bitcoin benefited from these measures, leading to rising prices and increased correlation. Subsequently, the main factors in play have been the trend of institutional investment, integrating Bitcoin more closely with traditional financial markets, and broader economic factors, such as inflation expectations, interest rate changes, and fiscal policies, impacting both equities and cryptocurrencies.
Interestingly, we saw an upward spike in correlation after the BTC ETF approval in January of this year. Given current macroeconomic trends, continued institutional adoption, and the market integration of cryptocurrencies, it's plausible that we will see a higher correlation between these assets in the coming months and years.
What does this mean for the Algocrat AI portfolio? Since it is designed to work well with Bitcoin during periods of both high and low correlation with equities, it doesn't mean anything specific. We have considered various correlation metrics when developing the systems comprising the portfolio and haven't found anything that can increase their edge.
Still, the Algocrat portfolio scored good gains on our public Algocrat AI account during recent months, and recent Binance results are even better than that (and they are, on average, better since Binance is still the biggest crypto exchange out there). Algocrat AI is designed specifically to take advantage of crypto market trends "on autopilot," regardless of the market context.
Best regards,
The Algocrat AI Team
