Bitcoin separates from other crypto in uncertain times
The price of the world's largest digital asset is down nearly 40% so far this year, extending declines amid the recent crypto market rout. But market observers say that bitcoin is holding up better than the rest.
Why it matters: Bitcoin has been moving in tandem with other crypto as well as stocks lately, begging the question of what role it should play in investors' portfolios.
Bitcoin's correlation with an index of digital assets (excluding stablecoins and of course, bitcoin) hit highs earlier this year at levels unseen since early 2020, according to Noelle Acheson, head of market insights at Genesis.
- The 60-day correlation between bitcoin and that index — which includes ethereum, BNB, cardano, solana and polkadot — was driven by investors focused on macroeconomic signals treating all those coins as so-called risk assets, Acheson tells Axios.
- And when the signals say "risk off," investors tend to sell assets they view as risky — like crypto.
The intrigue: That correlation between bitcoin and other crypto dropped sharply the week of May 11.
- "When the market crashed, bitcoin dominance shot up," Acheson says. And bitcoin has been outperforming other cryptocurrency lately.
- Acheson says that could be the event that severs the relationship between bitcoin and other crypto.
What's happening: Bitcoin is the main character in crypto in times of uncertainty.
- It's the oldest, largest and most liquid digital asset in the market. And the only one that SEC Chair Gary Gensler has openly categorized. (See: It's a commodity. Maybe.)
- Bitcoin market dominance, a measure of its market capitalization relative to the overall cryptocurrency market, is back to 45%, noted Acheson. It was only 36% when investors were expressing a preference for technological innovation implied in other coins.
- "Institutional investors are still nervous so they are rotating into bitcoin and out of more volatile crypto," Acheson says.
Yes, but: The bitcoin dominance metric requires historical context, says David Lawant, head of research at Bitwise Asset Management, among the largest crypto asset managers.
- The number rose from 32% to 72% in the three years to January 2021, but has been trending down since then, reaching a minimum of 39% in January 2022 and now, edged up to 44%.
"The biggest story in crypto over the last couple of years is the breadth of different applications that blossomed to the mainstream beyond bitcoin's digital gold," Lawant tells Axios.
- "What impressed me the most is that most of the bitcoin dominance gain in 2022 came from smaller assets, and a relatively small chunk came from ETH."
- To Lawant, that suggests ethereum is becoming a "household name" among the broader investing public, whereas bitcoin has taken hold in the minds of investors as digital gold.
Over the long term, diversification across crypto could be key, Lawant says.
Meanwhile, crypto natives look for institutional washout.
- Greater adoption of cryptocurrency is proving to be a double-edged sword. More money in crypto helped boost prices when times were good, but the new wave of crypto investors or so-called institutions (see: big money) helped tie bitcoin and stocks together.
The bottom line: Crypto market experts expect correlations to drop across risk assets after the dust settles — when that happens is uncertain.