CoinMetrics on Cryptoasset Valuation
In their weekly newsletter, blockchain analytics provider, CoinMetrics examined two increasingly popular narratives about Bitcoin valuation and its place within investment portfolios in the context of financial markets data. Bitcoin is increasingly regarded by many of its proponents as both an uncorrelated financial asset and a store of value. Therefore, Coin Metrics compared the correlation between Bitcoin and the S&P 500, finding that despite a near-zero level of historical correlation, since Mid-March, the correlation has reached all-time highs with a peak on March 12 when both traditional markets and cryptoassets saw extreme volatility. Following this date, correlation receded but then subsequently began to rise again, possibly marking the start of a longer-term upwards trend. The authors suggest that as the ramifications of COVID-19 continue to unfold, and markets suffer from frequent liquidity shocks, Bitcoin and US equities may continue to show a relatively strong correlation. In examining its claim to being a store of value, CoinMetrics compared Bitcoin’s correlation with Gold, a commonly-accepted ‘safe-haven asset’. Similar to its correlation with equities, they found that despite historically low levels of correlation, since March, both assets have correlated much more strongly and interestingly there has been no sign of this abating in recent weeks. While some analysts might regard safe haven status as a purely binary one, Coin Metrics points to the fact that liquidity crises and radical changes in monetary policy are likely to result in differing flows into alternative safe havens. While the US Dollar is typically the primary beneficiary of stretched market liquidity, Gold and possibly Bitcoin will experience net positive inflows in a period of globally synchronized monetary easing as is currently happening.
Cryptoasset valuation is and will likely continue to be an emerging and contentious field of study in the coming years. While in their early years, cryptocurrencies especially were considered by much of its user base as potential currency alternatives, in recent years, many within the Bitcoin community have increasingly focused on the asset’s supposed store of value property rather than as a medium of exchange. Measuring such claims against market data over the long-term is arguably the most reliable way to test such narratives. Whereas Gold over the past weeks and months has benefited from net inflows, Bitcoin and the wider cryptoasset market is arguably trend-less and certainly static at least for now. If such trends continue with a continued divergence between Bitcoin and Gold it will undermine what is perhaps the most-lauded benefit of the asset, namely its safe haven status. Likewise, if Bitcoin continues to correlate with equities, it will undermine another of its perceived advantages, namely its lack of correlation with traditional markets and with it, the ability to hedge risk in investment portfolios.