Correlations between equities and bitcoin have remained relatively elevated since March 2020, perhaps a sign of institutional adoption
Bitcoin falls slightly in November despite high historical returns for the month
Network difficulty decreases (albeit modestly) for the first time since July, implying a reduction in network hash rate likely driven by China
Correlations Perhaps a Sign of Institutional Adoption
Historically, bitcoin has not displayed sustained positive or negative correlations to equities. There have been periods of co-movement between the two assets, as well as periods in which bitcoin returns hedged equity moves, but these periods have been short-lived. For example, in the risk-off environment of March 2020, bitcoin and equities exhibited high correlations as the two assets sold off in tandem. However, since that event, correlations have remained positive, ranging roughly between 0.2 and 0.4.
This behavior is not surprising to us. As the investor mix becomes increasingly institutional, bitcoin becomes held alongside traditional asset classes like equities, which means it may exhibit some of the same risk-off patterns. Commodities went through a similar secular trend in the mid-2000s as commodity index investing became a popular investing tool, with correlations to equities generally drifting positive following the global financial crisis. This is not to say that bitcoin will stop becoming a valuable diversifier. An asset with correlations of 0.2 - 0.4 to equities and high returns still provides significant risk-adjusted benefits to a portfolio.
Bitcoin Down Slightly in November
After reaching an all-time intraday high of $69K in early November, bitcoin prices drifted lower over the course of the month, likely related to profit-taking. In all, the digital currency fell -5.4% on the month; not a significant decline compared to some of bitcoin’s worse months, but an underperformance compared to the +11.5% median return historically seen in November. Like November, December has also been a historically good month for bitcoin, with a median return of +12.3%. We will have to wait and see whether bitcoin price performance reverts to its seasonal averages.
Network Difficulty Declines for First Time Since Summer
The Bitcoin network is designed to produce blocks once every ten minutes on average. To maintain this average in the face of varying mining activity, the network modifies the difficulty of producing new blocks once every 2,016 blocks (two weeks), commonly referred to as a “difficulty period”. The latest difficulty period for Bitcoin ended on Sunday, November 28, resulting in a 1.5% decrease in difficulty, the first decline for the network since July.
The reason for the downward adjustment is likely a renewed crackdown on mining by China’s National Development and Reform Commission (NDRC) that started in the middle of November. This came on the heels of a corruption investigation related to a top Communist Party member in the Jiangxi province who had previously supported crypto mining. Although China made serious efforts to eliminate crypto mining entirely beginning in May, a small fraction of the network hash rate likely remains online, which is the target of China’s current focus.
Market Update
Bitcoin fell -3.1% on the week. Equities fell as well, with the S&P 500 down -2.6% and Nasdaq Composite down -2.9%. Gold decreased by -1.0%. Bonds increased on the week, with the Investment Grade Corporate Bonds appreciating by 1.4%, High Yield Corporate Bonds rising by 0.2%, and Long-Term U.S. Treasuries increasing by 4.0%. Real yields were mixed and inflation expectations decreased.
You are receiving this email because you signed up to receive our weekly research at www.nydig.com
This communication has been prepared solely for informational purposes and does not represent investment advice or provide an opinion regarding the fairness of any transaction to any and all parties nor does it constitute an offer, solicitation or a recommendation to buy or sell any particular security or instrument or to adopt any investment strategy. Charts and graphs provided herein are for illustrative purposes only. This communication does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of New York Digital Investment Group or its affiliates (collectively NYDIG).
It should not be assumed that NYDIG will make investment recommendations in the future that are consistent with the views expressed herein, or use any or all of the techniques or methods of analysis described herein. NYDIG may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this communication.
The information provided herein is valid only for the purpose stated herein and as of the date hereof (or such other date as may be indicated herein) and no undertaking has been made to update the information, which may be superseded by subsequent market events or for other reasons. The information in this communication may contain forward-looking statements regarding future events, targets or expectations. NYDIG neither assumes any duty to nor undertakes to update any forward-looking statements. There is no assurance that any forward-looking events or targets will be achieved, and actual outcomes may be significantly different from those shown herein. The information in this communication, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.
Information furnished by others, upon which all or portions of this communication are based, are from sources believed to be reliable. However, NYDIG makes no representation as to the accuracy, adequacy or completeness of such information and has accepted the information without further verification. No warranty is given as to the accuracy, adequacy or completeness of such information. No responsibility is taken for changes in market conditions or laws or regulations and no obligation is assumed to revise this communication to reflect changes, events or conditions that occur subsequent to the date hereof.
Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. Legal advice can only be provided by legal counsel. NYDIG shall have no liability to any third party in respect of this communication or any actions taken or decisions made as a consequence of the information set forth herein. By accepting this communication in its entirety, the recipient acknowledges its understanding and acceptance of the foregoing terms.
