Crypto Long & Short: How Bitcoin Correlations Drive the Narrative

Noelle Acheson dives into the role of correlation in bitcoin’s narrative and what investor activism coming to crypto could mean for the industry.

AccessTimeIconSep 13, 2020 at 6:07 p.m. UTC
Updated Sep 14, 2021 at 9:55 a.m. UTC

Every week there’s usually at least one article in CoinDesk, a blurb in a newsletter and several charts in the Twittersphere about bitcoin’s correlation with something or other.

This week, we were told that the 60-day correlation between gold and bitcoin (BTC) had reached all-time highs. Last week, our monthly report featured a chart of BTC’s correlation with the DXY dollar index. A few weeks before that, the correlation with the S&P 500 was in the headlines.

If you feel dizzy from the rapid turns in attention on which correlation metric matters, you’re not alone. But, you had better get used to it because the fascination with BTC’s correlation status is unlikely to fade any time soon.
What this reveals about bitcoin is intriguing. It’s not so much the correlation measures per se – they are fun to watch go up and down, but they’re not the deeper story. The deeper story is why it matters so much to us.

When we point to BTC’s increasing correlation with the S&P 500, gold, avocados or whatever, we are searching for a handle on its prevailing narrative. We hope that correlations will give us a clue.


BTC is a difficult asset to pin down. It is a scarce asset like gold, yet with a harder cap. It can be used for pseudonymous transactions, as can cash. It is a speculative holding for many, like equities. It is a bet on a new technology, like a growth stock. It is a hedge against a dollar collapse, a way to spread financial inclusion, an investment in financial evolution, a political statement. It is all of these, or none of these, depending on your intellectual leanings, economic philosophy and mood. 

The narrative we choose for bitcoin matters, though. Not only does it form our investment thesis around the asset, but it also influences our valuation methods. Do we extrapolate its potential price using the size of the gold market? The payments universe? Transaction fees? Something else entirely?

So, faced with such a slippery narrative, we look to correlations to tell the story. If it’s highly correlated with gold, then the market views it as a safe haven. If it’s more closely correlated to the S&P 500, then it’s a risk-on investment. If bitcoin’s correlation to the dollar index plummets, then it’s a hedge. 

We look to the market to tell us what bitcoin’s narrative is. But this creates a feedback loop (Follow gold! Follow Nasdaq!) that helps to perpetuate bitcoin’s momentum-fueled volatility, and which is often thrown off course by the evolving nature of markets. 

Make it a good one

BTC’s 60-day correlation with the S&P 500 has been coming down recently. That must mean it’s no longer a risk-on asset. Its increasing correlation with gold corroborates that, putting BTC back in the safe haven story.


But wait. You’ll have heard that BTC has not had a good run over the past few days. You’ll probably also have heard that Tesla has had a particularly bad time this week. I wonder if they’re correlated.


What do you know, it looks like BTC’s correlation with TSLA is increasing! BTC is now more correlated to TSLA than to the S&P 500. That must mean that bitcoin is now being seen as a tech stock. No wait, it’s being seen as a proxy for market hype. No wait, I mean it’s being seen as a moon shot. 

Obviously, I’m kidding, but point I’m trying to make is that short-term correlations can tell a good story, but they’re not that meaningful.

With a happy ending

Correlations are based on price movements, which, especially in these crazy times, do not always respond to common sense. Prices have, on the whole, become untethered from fundamental factors and are being pushed around by sentiment. Sentiment fuels momentum, which we often mistake for a trend; it also perpetuates the directionality of prices, which can exaggerate correlations.

Yet, sentiment can turn fast when investors are jittery, and there’s plenty to be jittery about. The story changes again. 

This grasping for data to back a story reveals our very human need to put bitcoin in context of things we’re already familiar with. If it goes into a certain mental box, it’s easier to understand and easier to make decisions about. Boxes are comfortable. Yet, in the long run, they are unsustainable.

In the short run, too: These markets are nuts, and boxes are being smashed all over the place. Bitcoin, which never did belong in any box that we know, is hopping from one story to another, as told by correlation metrics.

I like a good chart as much as anyone, probably even more so (after all, I am an analyst), and I plan to continue to watch the numbers stories with interest. But rather than use return relationships as a narrative crutch, I’ll be keeping an eye on what they say about what investors are looking for. 

For short-term market movements, what we think bitcoin’s narrative is doesn’t matter as much as what other people think bitcoin’s narrative is. Other people move the market, so we should know what asset framework they’re using. The correlation stories are useful for that.

For long-term market movements, correlations matter more for portfolio diversification than for anything else. In the not-too-distant future, markets will hopefully be less confusing and even short-term covariance and other relationships might be steadier, and easier to use for planning purposes. By then, even bitcoin’s correlations might start to matter less for the story and more for the allocation calculations.

By then, we will hopefully no longer need to put bitcoin in a pre-conceived box. It will have found its own narrative, understandable by all. 

Drawing lines

Investor activism comes to crypto. Technically it’s not the first time, but as far as I know it’s the first initiated by an institutional investor, which pushes it into a more public arena with potentially far-reaching consequences. 

California-based hedge fund manager Arca is stepping up its campaign to overhaul decentralized exchange and prediction market platform Gnosis, which raised $12.5 million in a 2017 initial coin offering (ICO). Arca’s complaint is that the project has seen its initial ICO proceeds and therefore its balance sheet multiply simply due to the increase in the price of ETH, and yet has not produced any products that accrue value to the token holders.

Arca insists Gnosis should at least trade at the net asset value of its treasury, which is at current prices $139 per GNO (the platform’s token, which at time of writing has a market price of $67), and that the mispricing is due to poor decisions on the part of management.

The investor has suggested to management that it use the bulk of its treasury to make a tender offer for all outstanding GNOs. This would value each token at approximately $90, providing a decent return for early investors. Since the report of Arca’s proposal came out last week, GNO has increased 34% in price (at time of writing), while bitcoin has fallen 4% over the same period.

The interesting part is not the potential flip for investors as they crowd out the upside. What’s important about this is how it changes the conversation around token investments, on so many levels.

First, it will unleash a healthy discussion around responsibility. Token sales, especially those issued in the heyday of 2017, are lightly regulated if at all, with no clearly defined lines of obligations. This discussion could professionalize the field and encourage other institutional investors to take an interest.

Second, it could refine the definition of “token.” Is it like a venture investment, where investors are expected to help their portfolio companies in exchange for greater potential returns? Yet venture investments aren’t liquid, and tokens to some extent are. So, is it more like equity, in which case, do token holders have stakeholder rights? Arca CIO Jeff Dorman believes his firm’s holding is like an interest-free loan, which comes with the expectation that lenders are kept informed of the borrower’s progress and plans for the proceeds.

And, third, it could influence investment strategies. We’ve seen the price of GNO jump over the past few days, presumably in the expectation that management will listen to Arca’s demands. Will we see activists intentionally accumulate tokens in order to influence a company’s direction? 

Finally, this could trigger some governance innovations. Apart from investors collectively insisting on more transparency and accountability, we could start to see some protocol or algorithm adjustments. What could investor activism look like on staking networks, where the amount of tokens you hold programmatically determines the say you have in certain governance issues? What if an investor wants to leverage that position to influence more than the protocol had contemplated? How can a project protect itself against predator stakes?

Given the scope of the problem and what it means for the evolution of token issuance as a fund-raising mechanism and as a value proposition, this situation is worth keeping an eye on. Arca’s initiative will most likely end up being about much more than a fair return on an investment. 

Anyone know what's going on yet?

As the relentless growth in COVID-19 cases around the world shines greater focus on the bumpy road to a vaccine, uncertainty in the timing of an economic recovery seems to be spilling over into stock market valuations. The S&P and Nasdaq look on track to have their second week of declines, for the first time since March.


Amidst the growing uncertainty, BTC also had a down week, significantly underperforming gold and equities and giving a boost to its 30-day volatility.


While it may feel like stock market volatility is back with a vengeance, the VIX is still well below its June level, and about where it was in December 2018. In other words, this isn’t too unusual. 


Both the latest U.S. unemployment and consumer price index figures came in slightly higher than expected, adding to the overall unease. As renowned investor Stanley Druckenmiller re-ignited the heated debate between those that expect inflation and those that expect deflation, expect greater focus on bitcoin’s narrative as an inflation hedge.


My colleague Nathan DiCamillo shows how we can follow the initial public offering of INX, the first registered offering of security tokens in the U.S., and gives more insight into how the issuance will work. TAKEAWAY: This is an eye-opening peek at the transparency of a security token offering, vs. a normal security offering. You can actually watch the securities move, in real time. That, plus the innovative business model behind them, and the evolution of capital markets they represent, and the fact that it’s the first token sale to register for retail distribution with the U.S. Securities and Exchange Commission, make this issuance worth following. 

Another issuance worth watching is that of Diginex, the Hong Kong-based company behind the newly launched crypto exchange. This week it announced that it has raised $20 million from four family offices and a hedge fund, ahead of an anticipated Nasdaq listing later this month via a special-purpose acquisition company (SPAC). TAKEAWAY: This will be the first crypto exchange to publicly list in the U.S., as well as an indication of public interest in crypto market infrastructure. For investors, it’s a listed play on the growth of the ecosystem. For analysts, it’s a welcome peek at the accounts of a market infrastructure participant, which could be even more interesting as rumors of a Coinbase listing continue to circulate.

Options market data shows an upward trend over the past couple of months in the traded volume of ether (ETH) puts vs. calls, which hints at a growing fear of a price drop. TAKEAWAY: The bitcoin (BTC) put-call ratio is flat over the same period, which implies that the hedging is specific to ETH. This could indicate greater concern about the fragility of the recent inflows into some decentralized finance (DeFi) platforms, and the potential impact on the network’s congestion and token price. 


The recent growth in bitcoin “accumulation addresses,” or addresses with at least two incoming bitcoin transfers in the last seven years and no spends, could indicate growing support for bitcoin in spite of lackluster price performance. TAKEAWAY: That we can even extract this metric is an example of the unique data sets available to crypto asset investors. Imagine having this level of information with traditional assets.


More than 30% of new customers at bitFlyer, one of the leading Japanese crypto exchanges, are in their 20s, according to a recent survey. TAKEAWAY: It’s not news that millennials are interested in crypto assets. Last year investment management firm Charles Schwab revealed in a quarterly report that bitcoin was the fifth most popular investment among its millennial customers. A JPMorgan report issued last month also flagged millennials’ penchant for bitcoin over gold. 

Investment management firm Wave Financial has received its first round of investment from clients for the Wave Kentucky Whiskey 2020 Digital Fund, which it plans to tokenize in a year or two. TAKEAWAY: I include this as an example of how interesting the tokenized security field will soon get. It should be clarified that holding a fund token does not give you access to the whiskey. It does allow you to share in the profits when the whiskey is eventually sold to wholesalers. Yes, this could be achieved without tokenization. And it remains to be seen how comfortable investors will be with this concept. The investment so far is still relatively small, but will be worth watching.

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