Bitcoin Correlation Risk

A member of our community asked:

"When bitcoin drops - EVERYTHING drops. Why does it have to be that way?"

Thank you for asking such a good and honest question. Many people don’t understand this issue. So . . . .

Correlation Risk. In investment portfolio management, there is a concept called “correlation risk.” In this context, that means the price of one asset moves in the same direction as the price of another asset. Assets can be positively or negatively correlated, which determines the direction and magnitude of their price changes. Portfolio mangers do everything possible to mitigate correlation risk.

All Assets Have Correlation Risk. Today, all global markets suffer from correlation risk because virtually all assets worldwide are pegged or intrinsically linked to fiat currencies or some other benchmark. Thus, when the price of fiat currencies or the benchmark changes, the price of everything else changes, too.

BTC’s Influence Over Crypto Markets is Waning. In this case, BTC is the benchmark cryptocurrency simply because it has the first-mover advantage, but BTC’s influence over the market is waning, and will likely become very weak over time. As the cryptocurrency markets grow, diversify, and become more mature, BTC will exert an increasingly smaller influence over all other cryptocurrencies, which means cryptos like ADA will not be as impacted by BTC’s price changes as they are today.

Looking Forward to Long-Run Gini Stability. As Gini becomes widely held, we expect it to emerge as an important benchmark in the crypto world and in the fiat world. In particular, its volatility should be far lower than BTC and other cryptos because the incentive structures embedded within the Gini Monetary Policy and Values Stream System are inherently designed to reward loyalty, long-run savings, and ongoing ecosystem contributions, which is not the case for BTC or any other cryptocurrency today. These Gini attributes could even result in Gini being less volatile than most fiat currencies over the long-run. We expect this to have a positive impact on the entire crypto market, and ultimately, the entire global economy.