Lyn Alden: Bitcoin Correlations Depend on What Phase It Is In

It turns out, the same factors that affect bitcoin's price - real rates of inflation, monetary and fiscal policy and market exuberance - also partially determine to which assets bitcoin is correlated.

All pre-programmed halving events occurred during periods where bitcoin had been off from its all-time highs for at least a year, and usually more than one year.

During those long consolidations, bitcoin becomes more correlated to short-term variables related to global liquidity and other risk assets.

Basically, the ongoing debates about the degree to which bitcoin is correlated to other assets would do well to break bitcoin's price behavior into two phases: bull runs and consolidation periods.

If we look at percent drawdowns in bitcoin compared to drawdowns in the S&P 500, for example, we can see a lot of correlation over the past two years in this consolidation phase, particularly when sharp drawdowns occur and investors broadly de-risk their holdings.

Over the past two years, we can see that bitcoin behaved in a similar way during its consolidation phase.

This chart shows the inflation-adjusted 10-year Treasury rate in blue on the left axis and the year-over-year percent change in the price of bitcoin in red on the right axis.

Bitcoin's price has been in a volatile rebound from the depths it experienced in late 2018 and early 2019.In this period, whenever real yields stalled or reversed upward bitcoin's price usually would either stall or reverse downward.

Going forward, bitcoin's price is likely to continue to be affected in the near-term by stimulus outcomes, and consequently shifts in inflation expectations and real yields.

When fundamentals turn back into a tailwind, likely due to another stimulus bill being passed and a renewed decline in real rates at some point, bitcoin likely has a lot more upside potential than similar asset classes.