Bitcoin Starts 2022 With Slump

January 10, 2022

On Jan. 3, Bitcoin turned 13, having launched on the same day in 2009. The world’s largest cryptocurrency has matured considerably since its creation. Once seen as a fringe idea, the coin is now decidedly mainstream.

Institutional adoption has been rapidly increasing in recent years. And a Bitcoin futures ETF finally hit the market last October, with the launch of the ProShares Bitcoin Strategy ETF (BITO).

Since then, two similar ETFs have launched. The Valkyrie Bitcoin Strategy ETF (BTF) and the VanEck Bitcoin Strategy ETF (XBTF) also rely on near-month bitcoin futures contracts in an effort to track the price of Bitcoin.

Due to their similarity, performance of the ETFs over their limited track record is nearly indistinguishable from one another.

 

 

Since mid-November, all three have lost more than 30%. Due to roll costs, this is slightly worse than the loss experienced by Bitcoin itself, which has slumped since reaching an all-time high on Nov. 10, 2021.

 

 

Another ETF that offers some exposure to the price of bitcoin is the Global X Blockchain and Bitcoin Strategy ETF (BITS), which also launched in mid-November. This ETF is actively managed, combining equity securities of blockchain companies along with bitcoin futures.

Performance for this ETF has been slightly worse than that of the futures-only ETFs.

 

 

What’s The Benefit Of Bitcoin?

Proponents of bitcoin and cryptocurrency in general list a multitude of benefits such as decentralization and high transaction speed. But from a portfolio perspective, it is the promise of low correlation to traditional assets such as equity or fixed income that is of particular value.

Combining assets with low correlation to one another increases the benefits of diversification within a portfolio. So if stocks sag but Bitcoin still rises, or vice versa, an investor who includes both within their portfolio will be better off.

In October 2020, Fidelity released a research paper showing that Bitcoin had an average correlation to other asset classes of 0.11 over the time period from January 2015 to September 2020.

 

Correlation

(For a larger view, click on the image above)

 

However, Fidelity’s own paper acknowledges the risk that as Bitcoin becomes more integrated within institutional portfolios, correlations could increase due to the greater overlap between market participants.

No Shelter From Storm

Though it is too early to tell whether this is the start of a longer slump or just a blip, risky high-growth names such as those held by the Invesco QQQ Trust (QQQ) or the ARK Innovation ETF (ARKK) have been particularly hard hit by the risk-off attitude exhibited by the market during the first trading week of the year.

And due to fixed income’s inverse relationship between price and yield, the iShares Core U.S. Aggregate Bond ETF (AGG) is negative for the year as well.

 

 

Cryptocurrencies have been affected in line with other risk assets, with Bitcoin, Ethereum, Ripple and much of the rest of the cryptocurrency market falling in tandem with these high-growth names.

A similar relationship between cryptocurrencies and stocks was observed last September. During this time frame, QQQ slumped by 5.7%, while the SPDR S&P 500 ETF Trust (SPY) fell by 4.7%. Bitcoin fell by 7.3% while Ethereum fell by 12.4% during the same period.

Buyer Beware

Though these time frames are too short to draw any substantial conclusions, it is clear that at least over the short term, an allocation to cryptocurrency does little to shelter portfolios in risk-off environments.

That doesn’t mean that there aren’t benefits to holding exposure. Bitcoin has seen tremendous price volatility since its 2009 inception, but has historically recovered from price slumps to reach new record highs.

However, those who have purchased a Bitcoin ETF or hold direct exposure should consider the asset’s role in their portfolio, especially if the end goal is to provide diversification to traditional financial assets like stocks and bonds.

Viewing cryptocurrency as a risky asset that has the potential for significant price appreciation while acknowledging that the asset class will likely experience volatility in skittish markets could be a better way to frame things instead of painting it as an alternative, low-correlation asset.

Investors who are surprised by the performance of an asset are likely to sell at the worst time.. On the other hand, poor performance is easier to digest if it is understandable and the investor can point to a rational justification for continuing to hold the asset.

Contact Jessica Ferringer at [email protected] and follow her on Twitter

Find your next ETF

Reset All