- Centralised Exchanges
- Crypto Asset Volatility
- Crypto Correlations
- Crypto Governance
- Crypto in the Portfolio
- Crypto Valuations
- Investment Highlight
- Security and Privacy
- Social Media Influence
- Stable Coins
- Traditional Finance and Crypto
- Web 3.0
Crypto Correlations Post Coronavirus Panic
by Tim Johnston
Apollo Capital has consistently reported that crypto assets do not correlate with traditional assets. Crypto assets are largely driven by a different investor base and are fundamentally unique. We believe that there is a strong argument for a small allocation to crypto assets within a broader portfolio, in part due to their lack of correlation to traditional assets.
Following the coronavirus market panic in March earlier this year, crypto assets have demonstrated a much higher level of correlation to traditional assets as markets have broadly recovered. We thought it timely to update our analysis and present our findings to investors.
More recently, crypto assets are once again decoupling from equities as Bitcoin explodes to yearly highs above US$13,000 while the major US and Australian indices stagnate. We expect this decreasing correlation to continue as retail and institutional focus continues to turn towards crypto assets.
The aftermath of the coronavirus market panic has been nothing short of extraordinary. It took less than 2 and a half months for the NASDAQ Composite to reclaim it’s all time high after falling over 30% peak-to-trough. During this time, Bitcoin and crypto assets experienced a similar V- shaped recovery as markets became confident that the US Federal Reserve would do everything in its power to support markets.
In March we witnessed a synchronised global flight to cash, from April onwards we witnessed a synchronised global flight to risk assets.
In previous blog posts on crypto correlations, we compared traditional assets to a hypothetical portfolio of the major crypto assets. The above graph shows the 12 month rolling correlation between the performance of the Apollo Capital Fund and the performance of Australian Equities, Australian Bonds and Gold.
The Fund’s correlation to Australian equities has been increasing significantly from March 2020 to present, this is likely attributable to coronavirus’s impact on global markets. We believe that this high level of correlation is unlikely to continue as the crypto asset market develops.
Before COVID-19 the Fund had a small positive correlation with all three of these assets classes. However, since May of 2020 the Apollo Capital Fund has been increasingly uncorrelated to both Australian Bonds and Gold.
The relatively high correlation between the fund’s returns and equities is largely a result of the increased correlation experienced after the coronavirus sell off. Unsurprisingly, the fund has demonstrated little correlation to Australian Bonds, International Bonds and Gold. Crypto assets and equities are also fundamentally different, but their recent correlation is a result of the ‘risk on’ attitude that was prevalent in the weeks following the initial market panic.
While the Fund maintains a high correlation to the performance of Bitcoin, our allocation to various high quality crypto assets has seen the Fund outperform Bitcoin by 73.7% since the start of the year.
At Apollo Capital, we believe there is a strong argument for a small allocation to crypto assets within a broader portfolio. Crypto assets have demonstrated that they are not out of reach in a broad market sell off. However, the future is bright as an independent asset that will continue to be impacted by different market forces to traditional asset classes.