Adatia notes that the mainstreaming of crypto assets, most notably with the approval of spot bitcoin ETFs by the US SEC, has contributed to this relationship. More institutions and retail investors can access bitcoin more easily, making it behave more like a traditional asset class. Adatia notes that by virtue of the exchange traded nature of bitcoin ETFs, price action has begun to resemble other equities more closely. He agrees that now the price of bitcoin appears to show some correlation with the large-cap technology sector.
Nicholas Mersch agrees that ETFs, institutionalization, and easier retail access have all resulted in bitcoin’s closer relationship to tech stocks. The Portfolio Manager at Purpose Investments sees this shift as part of an ongoing maturation of the asset class. He notes, too, that the correlation between bitcoin and large-cap tech has tended to rise when volatility rises.
“When investors get nervous and they tend to de-risk the same pockets all at once. And Bitcoin now sits in that high beta sort of liquidity sensitive bucket alongside these longer duration tech aspects,” Mersch says. “And I think if you take an optimistic angle of it, this very relationship can really help investors recognize that when the risk reward starts improving, it could be an attractive entry point.”
Whether they’re tracking bitcoin’s price for a means of easy entry, or as a ‘canary in the coal mine’ for other equities, Mersch and Adatia both highlight a few areas that they believe advisors can focus on to fully inform their view. Adatia notes that while price moves may be useful, they could be more of a product of volatility than significant moves into or out of the asset. Mersch highlights some of the actions taken within crypto communities, where long-term holders may be exiting positions which generates online chatter. He also notes that ETFs have allowed more institutions to access these assets, and institutional flows in and out of bitcoin ETFs can be tracked to help inform where appetites for these assets, and by extension other areas considered greater risk, might be. He also notes that because cryptocurrencies are not limited to trading during market hours, price movements in bitcoin can act as a surrogate for their correlated risk equities when their own markets are closed.
While bitcoin may be a useful tool to gauge broad market risk appetites, both Adatia and Mersch acknowledge that the space tends to come with volatility and noise. Rather than using even large liquidation events as reasons to completely de-risk, Adatia notes that these events should be taken with a grain of salt and examined as opportunities to either buy a dip or hedge uncertainty on the margins with allocations to something slightly more defensive.
