Raoul Pal explains why he isn't surprised by bitcoin's correlation to stocks

Bitcoin's value proposition in the eyes of investors has changed since its inception. 

Over the past decade, investors have touted bitcoin as a superior method of payment as well as a kind of digital gold. Some proponents have highlighted its nature as an uncorrelated asset as one feature that could make it a unique addition to a portfolio. 

As noted recently by research by Ark Invest, bitcoin's deviation from the "behavior of other asset classes" could help it "serve as a strategic allocation in a well-diversified portfolio." Still, for much of the Covid-19 crisis, bitcoin has remained fairly correlated to the broader stock market, as noted by research from The Block. 

Indeed, the 30-day rolling correlation between bitcoin and the S&P 500 has stood above 0.5 for the majority of the year. 

But according to macro investor Raoul Pal, co-founder of Real Vision, that makes sense given bitcoin's currency attributes. 

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"It has the attributes of a currency and a bit of a commodity," he told The Block. "Currencies are what's known as Bayesian in distribution—which means that they have shifting variables that affect them." 

He went on to say:

"Which is why currencies — which are very simple things — are so impossible to forecast. Because everyone goes look—it's the interest rate differential, and then it's not, and then it is the corporate M&A flow, and then it's not, and then it is the inflation rate in a country, then it is not. There's always a different reason. It shifts. Bitcoin has that. It has shifting correlation and that's okay. When you look over an extended period of time, the correction is not so much."

Considering the rate at which central banks have been expanding their balance sheet, bitcoin has outperformed—despite recent correlation. Here's Pal:

"Well, you take the G-4 central bank balance sheets, the equity market is basically underperformed over an extended period, then recently kind of held its own against it. Gold underperformed by 50%. Bitcoin [is] the only asset that killed it. Completely outperformed. Over-time even with the correlation between equities and bitcoin, the risk-reward is in favor of bitcoin."

Watch the full episode of The Block Live here

About Author

Frank Chaparro is Host of The Scoop podcast and Director of Special Projects. He also writes a biweekly newsletter. Chaparro started his career at Business Insider, where he specialized in the intersection of digital assets and Wall Street, market structure, and financial technology. Soon after joining Business Insider out of Fordham University, Chaparro was interviewing top finance and tech executives, including billionaire Mark Cuban, “Flash Boys” star Brad Katsuyama, Cboe Global Markets CEO Ed Tilly, and New York Stock Exchange President Tom Farley. In 2018, he become a sought after reporter in the crypto world, interviewing luminaries such as Tyler Winklevoss, the cofounder of Gemini, Jeremy Allaire, the CEO of Circle, and Fundstrat head Tom Lee. For inquiries or tips, email [email protected].