Bitcoin ended the previous week on high heels – both in terms of regaining the $11,000 level and in terms of positive news. Square, the online payments processor, announced a $50 million stake in Bitcoin.
More precisely, the company said that Bitcoin aligns perfectly with its mission, and it decided to invest one percent of total assets to Bitcoin. It is the second major announcement of a public company that it invests in Bitcoin after MicroStrategy announced an investment of over a hundred million dollars too. On top of that, Stone Ridge, a $10 billion asset manager, reveals a $115 million position in Bitcoin as part of a long-term project – more or less, one percent of all assets.
The question on every Bitcoin hodler now is – what if more public companies decide to diversify their holdings and put one percent into alternative digital assets like Bitcoin? If that is the case, the upside potential is huge.
Bitcoin and the Recent Price Action
Bitcoin found support at the $10,000 level before regaining the $11,000. On its way to the upside, it failed at $11,700. However, what is important here is that Bitcoin decoupled from the USD in the last weeks.
Recently, and that is especially the case after the pandemic reached Western nations, Bitcoin’s correlation with gold and the S&P 500 increased dramatically. The chart above shows the correlation between Bitcoin and gold and Bitcoin and the S&P 500. As a general rule, the S&P 500 is also viewed as “the market” because it comprises a large number of stocks and practically covers the entire market.
Correlations are of two types – positive and negative. Moreover, a perfectly positive correlation has a value of 1, while a perfectly negative correlation has a value of -1. The rule of thumb in the investing world is that it makes no sense to add a new asset to a portfolio if the correlation is bigger than 0.5 or lower than -0.5. If you do so, there are no diversification benefits to be obtained from the move.
As the chart shows, in 2020 Bitcoin and gold’s correlation exceeded 0.5 easily. The same is valid for Bitcoin and the broad stock market. As mentioned earlier, these correlations fell below 0.5 in the last couple of weeks. If they climb back above 0.5 and towards 1, the risk is that any long-term investment increases the risk in a portfolio, rather than decreasing it.