I hope that you, dear readers from the US, are lucky enough to enjoy a long holiday weekend. If so, remember that you have this day off because military members gave their lives.
Personally, I am taking advantage of this long weekend to see one of my closest friends get married. So this week's newsletter will be short and sweet and a little off the wall (and statistically insignificant). When I asked one of my other closest friends how I could convince you to read something like this, he gave me some great advice.
So, please. Let me write about decoupling. Cut me some slack.
- George Kaloudis
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Decoupling. The latest iteration of the "hope bill" for Bitcoiners and crypto natives. When it finally, inevitably happens, it will only be up for Big Crypto and down for Big Fiat.
But what it actually means is a bit weird. Decoupling is the moment when the bitcoin price decouples from stocks and starts to rise when stocks fall (and vice versa). Decoupling is the moment when Bitcoin (BTC) and stocks become negatively correlated. Bitcoin will rise to $1 million per coin and stocks will fall to zero.
It's a bit funny because not too long ago Bitcoin was uncorrelated with almost all macro stocks (gold, S&P 500, bonds, US dollar). We wrote about this in our 2021 research report (page 9). Here is the chart we shared in that report with the accompanying text.
In general, macroeconomic assets remained within an uncorrelated range (-0.2 to 0.2) in 2021. This is in contrast to 2H 2020, where gold and equities were somewhat positively correlated with BTC and the U.S. dollar (USD) was somewhat negatively correlated with BTC. Bitcoin is a unique macro asset like no other.For the record, correlation simply means how much two measures vary together divided by how much they normally vary individually (thanks, Noelle Acheson). We are interested in this so that we can describe the relationship between bitcoin returns and other assets. The correlation coefficient, the number or "r", refers to the strength of the relationship. In the context of asset returns, a correlation coefficient of:
- +1.0 means that Asset A has increased by x% and Asset B by x%.
- 0.0 means that Asset A has increased by x% and Asset B by y%, where there is no linear relationship between x and y (more on this below).
- -1.0 means Asset A gained x% and Asset B lost x%.
A correlation coefficient of 0.0 means uncorrelatedness and is either pretty easy or pretty hard to imagine (unless you have a chaotic mind). Either all the numbers in the data sets are exactly the same, a constant mathematically defined as undefined correlation, or the data set looks like complete chaos. It is not easy to create an arbitrary dataset with zero correlation (except for the boring orthogonal case), so I have added the boring dataset and an illustration of the chaotic case to illustrate this point.
Being uncorrelated is great, but wouldn't it be fascinating if bitcoin was negatively correlated with stocks? And then, when that happened, all stocks went on one hell of a run toward zero and Bitcoin went up and up forever? That's decoupling.
Decoupling would force traditional financiers to view Bitcoin as a risk-free asset. Yes - less risky than stocks. Volatile digital cash, which is mainly a speculative asset today, will be less risky than stocks after decoupling.
So when will decoupling happen?
Decoupling is also supposed to be aggressive: "Gradually, then suddenly" is one of its calling cards. Unfortunately, 2022 put the kibosh on dreams of aggressive decoupling. Here are the 90-day correlations in 2022 between bitcoin and the S&P 500 and Nasdaq Composite Index:
This is clearly not decoupling, but it looks interesting. In 2022, these stock indexes moved from weak positive correlation to bitcoin to positive strongly correlated range (>0.7). While bitcoin's return profile is not as impressive as a strong negative correlation, it still resembles a macro asset we have not seen before. Just a year ago, the correlation coefficient between the S&P 500 and bitcoin was negative and close to zero. It is remarkable that the correlation has increased from near zero to strong within a year. What's more, this correlation was already strongly negative in 2019.
So yes, Bitcoin is unique. And that's why it bears repeating: Bitcoin is unlike any other macro asset we know.
This all reads like a whole lot of nothing, aside from the uniqueness of Bitcoin (which we already knew). But there was something rather remarkable (and statistically insignificant) that I saw last Wednesday while scrolling through some charts. I saw this:
There it is, on the far left of this chart. The first signs of decoupling. When the decoupling? Maybe soon (but probably not).