February 22, 2024

Is Bitcoin Closer to Growth or Value Assets?

When trying to understand how Bitcoin correlates with other assets, it can be helpful to keep in mind the distinctionbetween growth assets and value assets.

Is bitcoin an asset of value or an asset of growth? I guess the answer will depend on who you ask this question to.

By the usual definition, the value is calledassets that trade below their fundamental valuation, and growth assets are those that grow significantly faster than any other comparable opportunity.

This means that an asset, in essence, can belong to both categories at the same time if its fundamental indicators grow so fast that the rising price cannot keep up with them.

Many critics here will argue that bitcoin is nothas a fundamental value. To which I can notice that and nothing has. It's not about some fundamental laws of physics. Any valuation of any financial asset is a purely mental construct.

However, to start a philosophical discussion is also not included in my plans. At least not today.

If you look at the data, in its current mode, bitcoin follows growth assets more than value.

Take a look at the dynamics of the 6-month correlation between bitcoin and large US growth stocks on the one hand and large value stocks on the other. There is a clear winner here.

Bitcoin correlation with large value stocks(blue) and growth (red). In its entire short history, bitcoin has never been as correlated with risky assets as it is now. Before COVID, bitcoin was not correlated with the stock market, after COVID this has changed.

One can argue about whether this regime will last long or not.

The number one question we need to ask ourselves is who is buying bitcoin, the second is with what investment thesis?

Bitcoin has fallen ~75% from its peak price.I think it's reasonable to assume that the vast majority of those who were just trying to ride the wave without any long-term persuasion have already capitulated and exited the market. Those who remain are either buying bitcoin as a value asset or just hardcore hodlers.

So is it possible that bitcoin is now more correlated with other risk assets labeled as value?

Let's try zooming in on the chart and take a closer look at the change in the correlation pattern.

Bitcoin correlation with large value stocks(blue) and growth (red). Will we reach the point of real decoupling (decoupling of rates) of growth and value assets in this bear market? And which ones will Bitcoin follow?

That's right, it hasn't happened yet.This means that going forward, bitcoin (and, by extension, all other digital assets) still has to worry about how tight monetary policy [primarily] the Fed can become.

But when it comes to comparing growth and value assets, it does matter. I'll show you how.

There are indices of large American stocksvalue and shares of growth. What does their performance look like relative to each other? Calculating the rolling annualized returns of the growth and value indices and subtracting the difference between them to get the spread,

The spread between the indexes of value stocks and growth stocks. Let's look at the difference between the average annual returns of these indices: when does one dominate the other?

Several major reversals over the past 20 years are highlighted on the timeline:

  • First of all, the end of the dot-com bubble. The Fed has tightened monetary conditions to such an extent that there has been the largest shift from growth to value in history.
  • Moving on to the sequence of events after 2008year, it should be noted that in 2010 the Federal Reserve System completed the «shock» part of his intervention. At this point, the growth index regains its advantage over the value index for the next 4 years.
  • In the pre-COVID period, the Fed has already begun to transition fromneutral policy to adaptive. This marked the beginning of the first bounce of the growth index against the value. Shock therapy amid COVID has reinforced this movement.
  • Starting in 2021, the Fed has put an end to the shocktherapy and in 2022 moved to tighten monetary conditions. This is the second biggest reversal in the growth-to-value ratio since the dot-com crash.

What I want to show here is that forWhat really matters in identifying turning points is the acceleration and deceleration phases of monetary conditions. That's why, no matter what you invest in, you can't ignore the macro environment. Ignoring macroeconomic conditions when allocating funds to assets is like ignoring the time of year when making a weather forecast. By doing this, you are missing out on important information. Don't ignore the macroseasonality factor.

The current macro season is pretty obvious:

  • Monetary conditions are tight.
  • The global economy is suffering.

Which, in terms of macro weather, translates as:

  • everything that depends on debt is at risk;
  • return on growth assets is likely to be weak;
  • the risk of a volatility spike/liquidity crunch is high.

Digital assets are a very new asset class, and untilso far it has existed only in soft monetary conditions. This means that we can only guess how they might react to situations like today.

Based on what we know about their relationship togrowth assets, we cannot expect them to rise sharply in the near future. Moreover, they are subject to the same risk of volatility as anything else.

Real relief can come from change.correlation pattern towards stocks value. This won't give you a guarantee of great performance either, but at least the chances of continued negative returns will be lower.

Therefore, the correlations described today with the two categories of risky assets and the differences between them may still be useful to us in the foreseeable future.


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