Increased Mainstream Adoption of Bitcoin Cuts Diversification Benefit, JPMorgan Says

Bitcoin's correlation with traditional markets could "erode" its "diversification value over time."

Jan 21, 2021 at 7:17 p.m. UTC
Updated Sep 14, 2021 at 10:59 a.m. UTC

JPMorgan strategists questioned bitcoin's utility as a reliable investment hedge in a memo published Thursday.

  • Calling bitcoin the “least reliable hedge during periods of acute market stress,” strategists Federico Manicardi and John Normand questioned bitcoin's ability to function as reliable diversification investment through times of economic uncertainty.
  • "Mainstreaming is reducing diversification benefits and leading to underperformance during crises," the memo said.
  • Bitcoin's recently heightened correlation with traditional markets, moreover, could "erode diversification value over time" if the strong positive correlation continues, they wrote.
  • Per Coin Metrics data, bitcoin and the S&P 500 have a 180-day correlation of 0.23, a relatively weak relationship, but still significantly stronger than a year ago.
  • Bitcoin's close relationship with price movements in legacy markets and the "mainstreaming" of cryptocurrency investing generally is "potentially converting them from insurance to leverage," the strategists wrote.
  • Bitcoin prices to date have pulled back slightly to below $32,000 at last check after nearly touching $42,000 the first week in January.
  • A similar sentiment was expressed in October 2020 by other JPMorgan strategists who wrote that bitcoin has proven itself to be more of a risk asset, than a safe haven.
  • What could change this pattern, however, is "a more unique macro shock related to much higher U.S. inflation or a breakdown of the payments system," the analysts said.
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