Bitcoin Price Volatility and the Making of a Mature Market
Bitcoin is useful in many ways, especially for utility-oriented reasons. The currency is a good way to make transactions, send money to friends and family, and help address more day-to-day concerns about financial privacy and hedging against inflation. In research conducted by Block, Inc. (formerly Square, Inc.) in 2022 and follow-up work in 2023, we found evidence that utility-oriented reasons for buying and owning bitcoin are becoming more prevalent. But a top reason remains the potential to make money, especially for individuals with above-average income and in countries where banking infrastructure is better developed and widely available. The same survey showed that price volatility was a key concern, with one-third of adults citing it as a reason not to purchase bitcoin (second only to “Don’t know enough about it” at 38%). This concern also made price volatility an area of focus among regulators skeptical of bitcoin’s place in the economy.
And while the fluctuating price of bitcoin draws a lot of attention, less well-known are the potential benefits of bitcoin as a diversification strategy. Here, we will discuss how bitcoin’s lack of correlation with other assets presents a long-term diversification opportunity.
While cross-asset correlation between bitcoin and other assets was recently at historic highs, this is proving to be the exception, as correlation has now mostly reverted back to the norm. In fact, when we look at data from 2015 to now, bitcoin is consistently less correlated with many of the major financial indices than those indices are with each other.
We also see evidence that greater retail adoption of bitcoin as a proportion of overall adoption will likely be a steadying force on bitcoin’s historical volatility (if combined with the higher share of long-term holders through the introduction of bitcoin exchange-traded funds (ETFs) and wider general availability). This evidence maintains bitcoin’s independence from other financial indices, as the proportion of long-term holders rises relative to that of short-term speculators.
"Bitcoin is consistently less correlated with many of the major financial indices than those indices are with each other"
Early bitcoin price volatility has been a feature, not a bug
We used the mean conditional value at risk (mCVAR) methodology to compare the performance of two hypothetical financial strategies, one with bitcoin and one without. The results show that the inclusion of bitcoin would have provided diversification benefits and increased returns over the period from 2015 through early 2023.
Research conducted by Cash App on how different user segments react to rising price volatility also suggests that as familiarity and experience with bitcoin grows, people shift away from price-reactionary trades and towards a longer-term focus and strategic outlook.* The findings from the Cash App research and the hypothetical financial strategy analysis indicates a long term benefit for those who include bitcoin as part of their investments and hold it for the long term.
“The inclusion of bitcoin can be part of a healthy financial plan.”
Diversification
Looking closely at how bitcoin price movements match those of other indices from 2015 to now, we see that overall, bitcoin stands out as being especially price-independent. This phenomenon holds even when we look only at days of negative price movements.
Bitcoin Behaves Differently Than Other Assets
The data also shows a noticeable increase in correlation during 2022. This analysis largely covers a period in which the price of bitcoin corrected sharply with other indices, as events in the global economy and crypto market spilled across most assets. The bitcoin market-value-to-realized-value (MVRV) is the measure of bitcoin’s market cap divided by the estimated value paid for all coins in existence at a given time. Similar to a company’s price-to-book ratio, the measure aims to assess whether the exchange-traded price is below fair value. As bitcoin prices have fallen along with many other assets, the MVRV was in steady decline throughout 2022. This decline indicates that bitcoin has been reverting back to its fair value after the dramatic price increases of 2020 and 2021.
After the Tumult of 2022 Bitcoin Returned to Fair Market Value
While there is limited historical data for bitcoin when compared to other financial assets, we have found that a long-term outlook on bitcoin has been both a positive and steadying force in fluctuating markets, with an average correlation coefficient of 0.22 with the S&P 500 going back to 2015.
Bitcoin and The S&P 500 Have Diverged Again
Bitcoin: A Maturing Market
Cash App conducted a study of people who have held bitcoin on the Cash App platform.* Among these bitcoin customers were power customers, who perform on-chain activity and other more advanced crypto activities, as well as people who consistently buy or trade bitcoin. The study found that in the face of price volatility, these experienced bitcoin customers were generally more tolerant of short-term volatility. Customers less familiar with bitcoin were more sensitive to volatility and more likely to sell their bitcoin in a panic as prices fell. The research suggests that both market experience and access to relatable knowledge and market education are crucial tools to help people become less price sensitive. As bitcoin becomes more ubiquitous, this higher tolerance towards volatility itself will continue to drive volatility down.
An Alternative Asset With Low Barrier To Entry
Alternative assets have long been tools to add diversification to one’s financial strategy. Compared to other popular alternative assets such as real estate, bitcoin is unique. The currency has a lower monetary barrier to entry. And people can own fractions of a bitcoin and enjoy the diversification benefits — and potential asymmetric risk-reward — without taking on large amounts of debt, for example, in the form of a mortgage.
Platforms such as Cash App offer customers the opportunity to partake in this alternative asset strategy, regardless of monetary constraints. Incorporating alternative assets such as bitcoin into one’s financial plan is a feasible and accessible diversification strategy, which also allows the user to enjoy the practical use cases of this innovative digital currency.
*See methodology for details on portfolio construction.
Methodology
We constructed a hypothetical financial strategy using 7 indices, which include S&P 500, Russell 2000, iShares S&P/TSX Global Gold Index ETF, iShares iBoxx $ High Yield Corporate Bond ETF, iShares U.S. IG Corporate Bond Index ETF, iShares Core U.S. REIT ETF, and bitcoin. Closing prices that we used in the analysis came from Yahoo Finance.
*Internal Cash App survey conducted in September of 2022.
This report includes forward-looking statements. Forward-looking statements include all statements other than statements of historical fact that could be deemed to be forward-looking. Forward-looking statements include discussions of the performance of Bitcoin and consumer behavior, which may change at any time. These statements are subject to significant risks and uncertainties. Actual results and performance could differ materially from those contemplated by forward-looking statements. Statements included in this report should not be considered as an indication of future performance.
Further, any analysis or opinion presented within this report is provided as general commentary and does not constitute investment advice. Investment in Bitcoin is subject to significant risk and uncertainty, and can lead to loss of money over short- or long-term periods.
Citations
Yahoo! Finance, S&P 500, retrieved April 13, 2023, from https://finance.yahoo.com/quote/%5EGSPC?p=%5EGSPC&.tsrc=fin-srch
Yahoo! Finance, Russell 2000, retrieved April 13, 2023, from https://finance.yahoo.com/quote/%5ERUT?p=^RUT&.tsrc=fin-srch
Yahoo! Finance, iShares S&P/TSX global gold index ETF (XGD.TO), retrieved April 13, 2023, from https://finance.yahoo.com/quote/XGD.TO?p=XGD.TO&.tsrc=fin-srch
Yahoo! Finance, iShares iBoxx $ high-yield corporate bond ETF (HYG), retrieved April 13, 2023, from https://finance.yahoo.com/quote/HYG?p=HYG&.tsrc=fin-srch
Yahoo! Finance, iShares iBoxx $ investment-grade corporate bond ETF (LQD), retrieved April 13, 2023, from https://finance.yahoo.com/quote/LQD?p=LQD&.tsrc=fin-srch
Yahoo! Finance, iShares Core U.S. REIT ETF (USRT), retrieved April 13, 2023, from https://finance.yahoo.com/quote/USRT?p=USRT&.tsrc=fin-srch
Yahoo! Finance, Bitcoin USD (BTC-USD) retrieved April 13, 2023, from https://finance.yahoo.com/quote/BTC-USD?p=BTC-USD&.tsrc=fin-srch
Bitcoin MVRV Ratio : Woobull Charts, retrieved August 2, 2023 from https://charts.woobull.com/bitcoin-mvrv-ratio/
Data file downloads. Coin Metrics, retrieved June 2, 2023 from https://coinmetrics.io/community-network-data/
2022 Bitcoin Survey Report: Knowledge and Perceptions. (May 26, 2022). 2022 Bitcoin Survey Report: Knowledge and Perceptions. Retrieved August 18, 2023, from https://block.xyz/inside/report-bitcoin-survey-2022
Bitcoin is useful in many ways, especially for utility-oriented reasons. The currency is a good way to make transactions, send money to friends and family, and help address more day-to-day concerns about financial privacy and hedging against inflation. In research conducted by Block, Inc. (formerly Square, Inc.) in 2022 and follow-up work in 2023, we found evidence that utility-oriented reasons for buying and owning bitcoin are becoming more prevalent. But a top reason remains the potential to make money, especially for individuals with above-average income and in countries where banking infrastructure is better developed and widely available. The same survey showed that price volatility was a key concern, with one-third of adults citing it as a reason not to purchase bitcoin (second only to “Don’t know enough about it” at 38%). This concern also made price volatility an area of focus among regulators skeptical of bitcoin’s place in the economy.
And while the fluctuating price of bitcoin draws a lot of attention, less well-known are the potential benefits of bitcoin as a diversification strategy. Here, we will discuss how bitcoin’s lack of correlation with other assets presents a long-term diversification opportunity.
While cross-asset correlation between bitcoin and other assets was recently at historic highs, this is proving to be the exception, as correlation has now mostly reverted back to the norm. In fact, when we look at data from 2015 to now, bitcoin is consistently less correlated with many of the major financial indices than those indices are with each other.
We also see evidence that greater retail adoption of bitcoin as a proportion of overall adoption will likely be a steadying force on bitcoin’s historical volatility (if combined with the higher share of long-term holders through the introduction of bitcoin exchange-traded funds (ETFs) and wider general availability). This evidence maintains bitcoin’s independence from other financial indices, as the proportion of long-term holders rises relative to that of short-term speculators.
"Bitcoin is consistently less correlated with many of the major financial indices than those indices are with each other"
Early bitcoin price volatility has been a feature, not a bug
We used the mean conditional value at risk (mCVAR) methodology to compare the performance of two hypothetical financial strategies, one with bitcoin and one without. The results show that the inclusion of bitcoin would have provided diversification benefits and increased returns over the period from 2015 through early 2023.
Research conducted by Cash App on how different user segments react to rising price volatility also suggests that as familiarity and experience with bitcoin grows, people shift away from price-reactionary trades and towards a longer-term focus and strategic outlook.* The findings from the Cash App research and the hypothetical financial strategy analysis indicates a long term benefit for those who include bitcoin as part of their investments and hold it for the long term.
“The inclusion of bitcoin can be part of a healthy financial plan.”
Diversification
Looking closely at how bitcoin price movements match those of other indices from 2015 to now, we see that overall, bitcoin stands out as being especially price-independent. This phenomenon holds even when we look only at days of negative price movements.
Bitcoin Behaves Differently Than Other Assets
The data also shows a noticeable increase in correlation during 2022. This analysis largely covers a period in which the price of bitcoin corrected sharply with other indices, as events in the global economy and crypto market spilled across most assets. The bitcoin market-value-to-realized-value (MVRV) is the measure of bitcoin’s market cap divided by the estimated value paid for all coins in existence at a given time. Similar to a company’s price-to-book ratio, the measure aims to assess whether the exchange-traded price is below fair value. As bitcoin prices have fallen along with many other assets, the MVRV was in steady decline throughout 2022. This decline indicates that bitcoin has been reverting back to its fair value after the dramatic price increases of 2020 and 2021.
After the Tumult of 2022 Bitcoin Returned to Fair Market Value
While there is limited historical data for bitcoin when compared to other financial assets, we have found that a long-term outlook on bitcoin has been both a positive and steadying force in fluctuating markets, with an average correlation coefficient of 0.22 with the S&P 500 going back to 2015.
Bitcoin and The S&P 500 Have Diverged Again
Bitcoin: A Maturing Market
Cash App conducted a study of people who have held bitcoin on the Cash App platform.* Among these bitcoin customers were power customers, who perform on-chain activity and other more advanced crypto activities, as well as people who consistently buy or trade bitcoin. The study found that in the face of price volatility, these experienced bitcoin customers were generally more tolerant of short-term volatility. Customers less familiar with bitcoin were more sensitive to volatility and more likely to sell their bitcoin in a panic as prices fell. The research suggests that both market experience and access to relatable knowledge and market education are crucial tools to help people become less price sensitive. As bitcoin becomes more ubiquitous, this higher tolerance towards volatility itself will continue to drive volatility down.
An Alternative Asset With Low Barrier To Entry
Alternative assets have long been tools to add diversification to one’s financial strategy. Compared to other popular alternative assets such as real estate, bitcoin is unique. The currency has a lower monetary barrier to entry. And people can own fractions of a bitcoin and enjoy the diversification benefits — and potential asymmetric risk-reward — without taking on large amounts of debt, for example, in the form of a mortgage.
Platforms such as Cash App offer customers the opportunity to partake in this alternative asset strategy, regardless of monetary constraints. Incorporating alternative assets such as bitcoin into one’s financial plan is a feasible and accessible diversification strategy, which also allows the user to enjoy the practical use cases of this innovative digital currency.
*See methodology for details on portfolio construction.
Methodology
We constructed a hypothetical financial strategy using 7 indices, which include S&P 500, Russell 2000, iShares S&P/TSX Global Gold Index ETF, iShares iBoxx $ High Yield Corporate Bond ETF, iShares U.S. IG Corporate Bond Index ETF, iShares Core U.S. REIT ETF, and bitcoin. Closing prices that we used in the analysis came from Yahoo Finance.
*Internal Cash App survey conducted in September of 2022.
This report includes forward-looking statements. Forward-looking statements include all statements other than statements of historical fact that could be deemed to be forward-looking. Forward-looking statements include discussions of the performance of Bitcoin and consumer behavior, which may change at any time. These statements are subject to significant risks and uncertainties. Actual results and performance could differ materially from those contemplated by forward-looking statements. Statements included in this report should not be considered as an indication of future performance.
Further, any analysis or opinion presented within this report is provided as general commentary and does not constitute investment advice. Investment in Bitcoin is subject to significant risk and uncertainty, and can lead to loss of money over short- or long-term periods.
Citations
Yahoo! Finance, S&P 500, retrieved April 13, 2023, from https://finance.yahoo.com/quote/%5EGSPC?p=%5EGSPC&.tsrc=fin-srch
Yahoo! Finance, Russell 2000, retrieved April 13, 2023, from https://finance.yahoo.com/quote/%5ERUT?p=^RUT&.tsrc=fin-srch
Yahoo! Finance, iShares S&P/TSX global gold index ETF (XGD.TO), retrieved April 13, 2023, from https://finance.yahoo.com/quote/XGD.TO?p=XGD.TO&.tsrc=fin-srch
Yahoo! Finance, iShares iBoxx $ high-yield corporate bond ETF (HYG), retrieved April 13, 2023, from https://finance.yahoo.com/quote/HYG?p=HYG&.tsrc=fin-srch
Yahoo! Finance, iShares iBoxx $ investment-grade corporate bond ETF (LQD), retrieved April 13, 2023, from https://finance.yahoo.com/quote/LQD?p=LQD&.tsrc=fin-srch
Yahoo! Finance, iShares Core U.S. REIT ETF (USRT), retrieved April 13, 2023, from https://finance.yahoo.com/quote/USRT?p=USRT&.tsrc=fin-srch
Yahoo! Finance, Bitcoin USD (BTC-USD) retrieved April 13, 2023, from https://finance.yahoo.com/quote/BTC-USD?p=BTC-USD&.tsrc=fin-srch
Bitcoin MVRV Ratio : Woobull Charts, retrieved August 2, 2023 from https://charts.woobull.com/bitcoin-mvrv-ratio/
Data file downloads. Coin Metrics, retrieved June 2, 2023 from https://coinmetrics.io/community-network-data/
2022 Bitcoin Survey Report: Knowledge and Perceptions. (May 26, 2022). 2022 Bitcoin Survey Report: Knowledge and Perceptions. Retrieved August 18, 2023, from https://block.xyz/inside/report-bitcoin-survey-2022