Mainstream financial entities are beginning to see Bitcoin (BTC) as a non-correlated asset, a concept Morgan Creek Digital Co-founder Anthony Pompliano has been promoting for over a year.
“If Bitcoin is not likely to correlate to economic factors, or to traditional equities and fixed income securities, then Bitcoin could serve as a portfolio diversification tool,” said chief economist at the Chicago Mercantile Exchange Bluford Putnam said in a Feb. 11 video on Finbold.
Bitcoin’s price does not move in stride with traditional markets
Since Bitcoin is a new kind of borderless and decentralized asset, it makes sense that it would not track the same price fluctuations seen in traditional markets, such as stocks and bonds. BTC has shown evidence for this lack of correlation several times in its history, including
Crypto expert Anthony Pompliano, or Pomp, as he is known on social media, has expressed this concept for years.
“The most important part of Bitcoin, when it comes to the global hedge, is the fact that it’s a non-correlated asset — meaning that, as stocks go up or down, Bitcoin doesn’t have correlation to that,” Pomp told CryptoX in an earlier interview.
Traditional market managers are just catching on now
Over the years, various people have knocked Bitcoin as a viable stable portfolio option due to the asset’s wild price fluctuations. In spite of Bitcoin’s volatile price action, however, Putnam said the coin’s lack of mainstream correlation might make it a valuable, albeit small, addition to portfolios.
“Since Bitcoin is highly volatile, only a very small allocation — say, 2% of the portfolio — might reduce risk if the lack of correlation holds,” Putnam said.
Putnam is referring to a typical hedge-type portfolio, which normally holds 60% stocks and 40% fixed income assets, such as bonds. Historically, this percentage allotment has proven itself stable in value during most economic situations.
According to 2019 experimentation, Putnam said adding 2% Bitcoin to the mix slightly reduced overall risk. Putnam explained:
“The portfolio for potential diversification also shows up in how Bitcoin prices might behave if geopolitical events destabilize traditional markets and created uncertainty.”
In August 2019, Pompliano forecast that Bitcoin would make its way into all institutional portfolios eventually.
CME declined to expand on Putnam’s comments for this article. CryptoX reached out to Pompliano for additional details but received no response as of press time. This article will be updated accordingly should a response come in.
