Despite the volatility of Bitcoin and other cryptocurrencies, some investment experts and analysts still believe that it is important to own these digital assets. According to them, the cryptocurrency market appears to operate separately from the rest of the financial market.
Cryptocurrency is Relatively Easy to Acquire
In times past, precious metals like gold was a haven for investors looking to diversify their portfolio and save part of their wealth in a stable commodity. In recent times, Bitcoin seems to have become an even more popular choice. For one, it is much easier to acquire and transfer.
One of the clearest examples of why the ease of Bitcoin acquisition and transfer is a significant advantage is the situation in China. In mid-July, news emerged that the government was going to accelerate its currency devaluation timetable. In response, affluent Chinese quickly moved their wealth to Bitcoin, contributing to the massive July 19 price spike.
Bitcoin Has No Correlation with Other Asset Markets
Writing for Forbes, tech stock analyst Chuck Jones identified a critical benefit of investing in cryptocurrencies – their lack of correlation with other assets. The mainstream markets tend to go through periods of uncertainty or even total collapse. Investors end up taking massive losses. Without a significant hedge against such risks, the end result could be even more unpalatable.
While Bitcoin certainly has its periods of extreme volatility, if past performance is any indication, it always seems to recover – and climb to even greater valuation – over time.
In a recent study by Fundstrat, it was discovered that Bitcoin has little correlation with other asset classes. The study compared Bitcoin and other cryptocurrencies to asset classes like the S&P 500, gold, oil, commodities, U.S. dollar, etc.
Cryptocurrency Prices Respond to Market Specific Stimuli
Another inquiry by the National Bureau of Economic Analysis also came to a similar conclusion. In a 25-page report published by the Bureau, it stated that the prices of Bitcoin, Ethereum, and Ripple weren’t affected by traditional market factors. Instead, only cryptocurrency market-specific factors seemed to have any effect on the price movements of these virtual currencies.
The study identified two main factors – “the momentum effect” and “the investor attention effect,” that affected the price trajectory of those three cryptos. According to the report, these two factors consistently explain the price behavior of BTC, ETH, and XRP.
Do you agree with Chuck Jones’ assertion that Bitcoin is a smart hedge against uncertainties in the mainstream asset market? Let us know your views in the comments.
Images courtesy of Coinmarketcap, Forbes, Shutterstock