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What is the Correlation Between Bitcoin and Traditional Markets?
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A recent report by Digital Asset Data illustrates why many investors are so eager to put their money into Bitcoin despite volatility risks.
This three-month chart shows Bitcoin’s correlation to gold and the stock market (represented by the SPDR S&P 500 Trust – a popular exchange-traded fund).
It’s clear that when the stock market gains value, dollars tend to flow out of Bitcoin and vice versa. This could explain why institutional investment in the number one cryptocurrency has been on the rise. Despite risks, uncertainty and notorious market volatility, Bitcoin offers a new way to diversify an investment portfolio.
A safe haven?
To some investors, Bitcoin has become a safe haven asset. Given current geopolitical tensions, finding a stable store of value is a lot easier when it is decentralized and not subject to market forces such as interest rates.
The catch is that balancing a portfolio with uncorrelated assets is another form of speculation – hoping one will remain stable when others show volatility. Bitcoin’s volatility is introduced when speculation is aggregated across millions of investors.
The power of the narrative becomes important and as a result, the price of Bitcoin becomes sensitive to regulatory uncertainty, politics and general public perception.
Successfully managing a portfolio in the context of such price swings is a challenge, but it can be done. Learn how to trade cryptocurrency in volatile markets here.