24Mar 2020

Crypto Correlations & Coronavirus

by Tim Johnston

Crypto assets are unlike any other asset class. They are unique, independent and are largely driven by a different investor-base. In theory, crypto assets should not correlate with other assets like equities and bonds. The data backs up this theory, most of the time.

Crypto assets have not been tested in a broad-based market sell off, like a GFC or dot-com crash. Crypto assets were not around during past major equities crashes. In fact, since crypto assets were born, equity markets have enjoyed an almost uninterrupted bull run.

This has now ended. With the devastating impact of the Coronavirus on our community and economy, equity markets have crashed. The ASX is down around 30% and has seen unprecedented volatility in the past two weeks of trading. Where typically a large move on the ASX was around 1.5%, in the past 2 weeks of trading, the market’s daily fluctuations have been between 3% and 7%.

The question becomes whether the theory that crypto assets are independent and uncorrelated will hold during the realities of market crashes.

The early signals appear mixed.

On the 12th of March crypto prices fell around 40%. This was disappointing as crypto assets had been holding up well since the Coronavirus news started impacting equity markets. As Henrik reported last week, this crash looks to be attributable to general market panic and the forced unwinding of leveraged positions on futures exchanges. When markets panic, investors flock to cash. Crypto assets were not spared.

Below is the rolling monthly correlations of crypto assets to equities, bonds and gold, from an Australian investor’s perspective:


The graph above can be divided into two sections: before “Feb-20” and after “Feb-20”. Before “Feb-20”, crypto assets exhibited no meaningful correlation to other assets. While there might be periods of temporary correlation, we have previously demonstrated that over longer timeframes, crypto assets do not correlate with other assets.  After “Feb-20”, around the time Coronavirus hit markets, we note that crypto assets start to positively correlate with equities and gold, and negatively correlate with bonds. The data backs up our observations that crypto assets have performed in a similar fashion to gold and equities.

After markets initially panic, the dust settles and investors ask, where to from here? For crypto asset investors, will the theory of an independent, uncorrelated asset hold?

Recent market movements show that crypto assets are starting to decouple from equities. Late last week we saw ‘green shoots’ of the crypto asset safe haven theory. Crypto prices shot up over 20%, while other assets continue to be volatile. Last night, crypto assets surged upwards around 7%, while the S&P 500 closed down around 3%.

We don’t know where markets will go from here. If equity markets continue to fall, on one hand crypto assets might correlate and fall with them, in which case investors would probably be no worse off than if they remained in equities. On the other hand, there is a reasonable chance that crypto assets might continue to decouple from equities and we see the blue line in the graph above return towards 0.

Given the uncertainty, we believe there is a very strong case for a small allocation to crypto assets. We believe there is a strong chance the theory will hold.

In portfolios comprising large holdings of stocks, bonds and even gold, we ask, why wouldn’t you have a small allocation to crypto assets? They might prove a valuable hedge in these uncertain times.

Tim Johnston

Tim is the Managing Director at Apollo Crypto. He has substantial expertise in both traditional financial services and technology investing. In financial investing, he worked at DMP Asset Management, a boutique Australian Equities Fund Manager, and was part of the investment team that managed a $33 billion super fund. On the technology side, Tim has worked as a venture capital Associate at Dominet Venture Partners and has been active in crypto markets for over four years. Tim is a CFA charterholder.