With the arrival of the first US approved Bitcoin ETF's comes the necessity of thinking about how much risk a BTC ETF will add to traditional portfolios (stocks, bonds, cash, etc). Readers of this blog will remember months ago where I taught you how to figure this out in excel. You can find that at this link if you missed it.
Why is this important? Whereas people often point to the low correlation of Bitcoin to equities, its important to note that correlations are artifacts of history and are notoriously unstable. Below I'm pasting a study where I show the 30 day rolling correlation of Bitcoin to the S&P 500 ETF (SPY). While over the broader time period, the correlation between the two averaged roughly .07, you can also see where it had a tendency to spike.
Sadly, some of those spikes happened during periods of extreme risk off events where everything went down. And given how volatile crypto assets can be (see prior post here), when correlations rise during sell-offs, adding more volatile assets actually injects additional risk into your portfolio rather than diversifying it away. This means it is critical to size your position intentionally. If you haven't read it before, please take a quick look at the link above to see how easy it is to figure out in excel.
As always, this is not investment advice. Please do your own research!
Cheers,
NZFX
