Be careful what you wish for. The crypto community continues to beg big investors to get on board with bitcoin, but there could be some unintended – and alarming – side effects. Most notably, bitcoin could be destined to hitch its wagon to the fate of the Dow Jones Industrial Average.
While cryptocurrencies should be a respite from the stock market, their mettle has yet to be tested in the flames of an economic downturn. Plus, as widely cited economist Alex Kruger points out, crypto has thus far only been a retail phenomenon. Once the institutional doors swing open to crypto, the dynamics could shift. In times of trouble, investors just may find that bitcoin and the Dow have more in common than they previously thought – despite the decentralized nature of crypto.
If Wall Street goes full-crypto, the bitcoin price could become highly-correlated with the Dow – for better or worse.
Kruger might have shocked some in the crypto community when he suggested that in time of economic crisis, bitcoin will offer little flight to safety.
“IMO crypto will behave like a highly correlated high-beta asset class. Not where you go to for diversification purposes.”
What gives? Bitcoin and the Dow are supposed to be non-correlated assets, not trade in lockstep when investors need diversity the most. Crypto should provide the shade of diversification that bolsters returns and slashes risk. That’s what “asset allocators” are banking on. Bitcoin’s low correlation with the Dow, however, could be shortlived.