What Type of Asset is Bitcoin? An Answer from the
Stock Market
Marco I. Bonelli, Ph.D.
1
Fort Hayes State University- 600 Park St, Hays KS 67601-USA
Email: mibonelli@fhsu.edu
ABSTRACT
In recent years, bitcoin has been at the center of a debate: is it a financial asset or not? If it is an asset, what
kind of asset is it? Is it a tradable, speculative asset, or is it a long-term investment? The debate has largely
unfolded around the real nature of Bitcoin and its correlation with other asset classes. Some scholars have
discussed the correlation coefficient of bitcoin using the S&P 500 Index, the Volatility Index, and gold.
However, the debate is now sufficiently mature to discuss the reasons determining its correlation with other
assets. We study the correlations of Bitcoin and one benchmark, a stock market index—specifically, the
Nasdaq 100 Index. Our focus is on the correlation between Bitcoin and the Nasdaq 100 as a proxy for the
most representative technology stocks. We show that the correlation between the two has grown substantially
since 2018, and has increased more since the beginning of the COVID-19 pandemic.
Keywords: Bitcoin, Asset class, Stock market, Nasdaq 100 index, COVID-19, Cryptocurrencies
1. INTRODUCTION
1.1 The Bitcoin Boom: Asset or Currency?
Since its inception, just a minority of scholars have
approached Bitcoin agnostically. Just a few have never
participated in the debate between those who think of
Bitcoin as a fraud and those who are its strongest
cheerleaders. The reason for the divide among scholars and
practitioners, however, is that the two sides seem to disagree
fundamentally on the meaning of Bitcoin. Here, we argue
that Bitcoin is indeed an asset because of its strong
correlation and similarity with large-cap leading-edge
technology stock assets. As it has characteristics that
resemble a currency, you cannot, therefore, just trade it, but
must also value it in case you want to invest in it.
lower cash flows and greater risk. Simultaneously, assets
can be priced relative to one another by scaling the price you
pay to a common metric. With stocks, this takes the form of
comparing pricing multiples (PE ratio, EV/EBITDA, P/B
ratio, or Value/Sales) across similar companies to form
pricing judgments about which stocks are cheap and which
are expensive.
2.
Currencies: A currency is a medium of exchange
used to denominate cash flows and is a store of purchasing
power if you choose not to invest it. Standing alone,
currencies generate no cash flow and, thus, they cannot be
valued, but they can be priced against each other. Over the
long term, currencies that are accepted widely as a medium
of exchange and hold their purchasing power better should
see their prices rise relative to currencies that lack those
characteristics. In the short term, however, other forces,
including governments trying to manipulate exchange rates,
may dominate.
1.3 Trading versus Investing
1.2 Assets versus Currencies
Almost everything can be priced as long as it is subject to
the law of demand and supply. However, not everything
can be as easily valued because of the obvious distinction
between value and price. Let us start by positing that
Bitcoin falls into one of the two following categories:
1.
Cash Generating Assets: An asset generates or is
expected to generate cash flow in the future. Stock is an
asset because it is a claim on the cash flow of that business.
What such assets have in common is that the cash flow of
the underlying asset can be valued, and assets with higher
cash flows and less risk will be valued more than assets with
There is a divide between investing and trading.
Considering that difference, to invest in something, you
need to assess its value, compare the price, and then act on
that comparison, buying if the price is less than its value and
selling if it is more than its value. Trading is a much simpler
exercise, where you price something, evaluate whether its
price will go up or down in the next period, and then make
a pricing bet. While you can be successful at either, the skill
sets and tool kits you use are different for investing and
trading, and what makes a good investor may differ from
what is needed to be a good trader.
1
In terms of the Bitcoin price, it has experienced a dramatic
increase: from $5.28 in 2010 to values above $2,500 in
2017. As shown in Figure 1, its price has been volatile with
severe ups and downs. However, after its incredible peak in
2018, Bitcoin’s volatility accelerated even further and
continues even today at levels unmatched by any other asset,
security, or currency.
From 2010 onward, for the following seven years, Bitcoin’s
returns have exhibited the highest returns and standard
deviation (or volatility) compared with returns on other
assets. Thus, currently, its levels of historical returns and
volatility are not comparable to any other asset [1].
Figure 1 Bitcoin price 2013 through 2020
(Investing.com)
stock indices and high-yield corporate bonds and the lowest
negative correlations (-0.03) with the U.S. Treasury Bond
index. No other asset exhibited such weak correlations with
other assets across the board” [1]. Most scholars agree that
Bitcoin is distinct from traditional, conventional assets.
However, we believe this will change, and thus, this is the
focus of our empirical analysis.
2. BACKGROUND
Consistent with the thinking of Yermack [2] in 2015, it is
evident that “Bitcoin returns were not correlated with any
of the analyzed asset returns. Bitcoin displayed the highest
positive correlation (0.05) with the S&P 500 and S&P 600
2.1 What is Bitcoin?
The first step in a serious debate on Bitcoin is to decide
whether it is an asset, a currency, or a commodity, like
gold; however, in this paper, we are going to limit
ourselves to a discussion of the first two asset classes. We
argue that Bitcoin is a standalone asset for those who want
to trade it even though it does not generate cash flows,
triggering the question: what kind of asset is Bitcoin?
2.3 Bitcoin as a Currency
We can also argue that Bitcoin is, to some extent, a
currency; however, “it is not a good one yet, insofar as it
has only limited acceptance as a medium of exchange and it
is too volatile to be a store of value” [3]. Going forward,
there are three possible paths we see for Bitcoin as a
currency; from best case to worst case, these are:
2.2 Bitcoin as an Asset
2
1.
2.
3.
A Global Digital Currency: In the best-case
scenario, Bitcoin gains general acceptance in
transactions across the world, becoming a widely
used global digital currency. For this to happen, it
has to become more stable (relative to other
currencies), central banks and governments
around the world have to accept its use (or at least
not actively try to impede it), and the mystery
around it has to fade. If that happens, it could
compete with fiat currencies, and given the
algorithm sets limits on its creation, its high price
could be justified.
Gold for Millennials: In this scenario, Bitcoin
becomes a haven for those who do not trust central
banks, governments, and fiat currencies. In short,
it takes on the role that gold has played historically
for those who have lost trust in or fear centralized
authority. Interestingly, the language of Bitcoin is
filled with mining terminology since it suggests
that, intentionally or otherwise, the creators of
Bitcoin shared this vision. The hard cap on Bitcoin
of 21 million is more compatible with this
scenario than the first one. If this scenario unfolds,
and Bitcoin shows the same staying power as gold,
it will behave like gold, rising during crises and
dropping in more prosperous times [4].
The 21st Century Tulip Bulb: In this worst-case
scenario, Bitcoin soars, attracting more money
from those who see it as a source of easy profits,
but just as quickly flames out as these traders
move on to something new and different. Even the
more skeptical will admit that Bitcoin is here to
stay and is not the result of a speculative bubble.
Nobody knows which of these scenarios will unfold, but
the first two are plausible scenarios. If you are trading in
Bitcoin, you may not care, since your time horizon may be
in minutes and hours, instead of weeks, months, or years.
However, if you have a longer-term interest in Bitcoin,
your focus could be less on the noise of day-to-day price
movements and more on advancements in its use as a
currency. Note that you could be a pessimist on Bitcoin
and other cryptocurrencies, but an optimist (like us) about
the underlying technology, especially block chain, and its
potential for disruption.
3. EMPIRICAL ANALYSIS
In statistical evaluations, the correlation coefficient (CC) is
used to measure the correlation between two sets of data. In
this case, the data sets are Bitcoin (BTC) and the Nasdaq
100 (NDX) as a proxy index for 100 representative
technology stocks. The correlation between the two
represents the degree to which they are related. It is based
on a scale of 1 to -1. The closer the CC is to 1, the higher
their positive correlation. The variables will move up and
down together. The closer the CC is to -1, the more they are
moving in opposite directions. A value of 0 indicates that
there is no correlation.
3.1 The Tradingview.com built-in CC
Calculator
We used the financial site tradingview.com to obtain the
CC values between BTC and the NDX. The CC
calculation uses closing prices. The example in Table 1
shows how the tradingview.com CC calculator works,
using the closing prices over five periods.
Table 1 Closing prices of Bitcoin and Nasdaq 100
Index over five periods
PERIOD
DATE
SECURITY 1
SECURITY 2
Date
BTC
NDX
1
05-Jun-20
9806,39
9824,39
2
04-Jun-20
9651,48
9629,66
3
03-Jun-20
9521,16
9704,69
4
02-Jun-20
10200,00
9657,31
5
01-Jun-20
9445,21
9598,89
The data needed can be set up (preferably in a table) in
three steps:
1. First, every period needs to be squared for both
securities.
Table 1a Bitcoin and Nasdaq 100 prices squared
PERIOD
DATE
SECURITY 1
Date
BTC
SECURITY 2
NDX
BTC squared
NDX squared
1
05-Jun-20
9806,39
9824,39
96165284,83
96518638,87
2
04-Jun-20
9651,48
9629,66
93151066,19
92730351,72
3
03-Jun-20
9521,16
9704,69
90652487,75
94181008,00
4
02-Jun-20
10200,00
9657,31
104040000,00
93263636,44
5
01-Jun-20
9445,21
9598,89
89211991,94
92138689,23
2. Second, each period value of BTC needs to be
multiplied by each period of NDX. Please note the last
column.
Table 1b Bitcoin and Nasdaq 100 prices squared
and multiplied
3
PERIOD
DATE
Date
SECURITY 1 SECURITY 2
BTC
NDX
BTC squared NDX squared BTC x NDX
1
05-Jun-20 9806,39
9824,39 96165284,83 96518638,87 96341799,85
2
04-Jun-20 9651,48
9629,66 93151066,19 92730351,72 92940470,90
3
03-Jun-20 9521,16
9704,69 90652487,75 94181008,00 92399906,24
4
02-Jun-20 10200,00
9657,31 104040000,0093263636,44 98504562,00
5
01-Jun-20 9445,21
9598,89 89211991,94 92138689,23 90663531,82
3. Third, the values of all the periods combined need to be
averaged.
Table 1c Averages for all values
PERIOD
DATE
SECURITY 1
Date
BTC
SECURITY 2
NDX
BTC squared
NDX squared
BTC x NDX
1
05-Jun-20
9806,39
9824,39
96165284,83
96518638,87
96341799,85
2
04-Jun-20
9651,48
9629,66
93151066,19
92730351,72
92940470,90
3
03-Jun-20
9521,16
9704,69
90652487,75
94181008,00
92399906,24
4
02-Jun-20
10200,00
9657,31
104040000,00
93263636,44
98504562,00
5
01-Jun-20
AVERAGE
9445,21
9598,89
89211991,94
92138689,23
90663531,82
9724,85
9682,99
94644166,14
93766464,85
94170054,16
Once these data are captured in a table, the rest of the
correlation calculation can be completed in the following
three steps.
1.
First, we calculate the variance for both securities
as:
Variance = Squared Average - (Average Value x
Average Value).
Resulting in:
BTC variance: 71,458.62
NDX variance: 6,169.50;
2.
Next, we calculate the covariance of the securities
as:
Covariance = (Average Value of Security1 x
Security2) - (Security1 Average Value x Security2
Average Value).
Resulting in:
BTC & NDX covariance = 4,428.86;
3.
Last, we calculate the CC as:
CC = Covariance / SQRT(Security1 Variance x
Security2 Variance).
As discussed, the CC of Bitcoin with any other asset has
been erratic, which has been true for the NDX as well. We
can observe this in Figure 2 [5]. In fact, we can state that
with the exception of 2014, the CC is unconvincing;
however, it does become more stable and stronger in 2017,
and the trend continues even during the last six months of
the COVID-19.
3.3 The Last Four Years
In the last four years, the CC has been positive and often
above .66, closer to 1, showing a strong correlation between
BTC and NDX, with an exception in two periods where
BTX inverted its trend (i.e., moved in the opposite direction
of the NDX). The two periods can be easily seen in Figure
3, where the values of BTC are higher than those of the
NDX. We can see that the BTC line is trying to “trail”
toward the line of the NDX, which in technical terms
becomes an area of “support” and “resistance” [6].
In both cases, the return to a positive correlation takes place
at the end of the only two significant corrections: at the end
of 2018 and during COVID-19 in the first quarter of the
year. That might represent a signal for Bitcoin to rally;
therefore, we will pay attention to its future price trends
after periods of negative CC between BTC and NDX.
3.4 Bitcoin During COVID-19
During Bitcoin’s existence and relevant presence, starting
in 2013, and namely, since 2017, when a sound correlation
with other assets emerged, there has been no such severe
situation in the global financial markets to prove or
disprove this CC strength before the COVID-19 pandemic.
Kristoufek [4] states that during the COVID-19 period, he
studied “the quantile correlations of Bitcoin and two
benchmarks (S&P 500 and VIX)” and two benchmarks
(S&P 500 and VIX)” and made a “comparison with gold
as the traditional safe haven asset. The Bitcoin safe haven
story is shown and discussed to be unsubstantiated and farfetched, while gold comes out as a clear winner in this
contest.”
Resulting in:
BTC & NDX CC = 0.21
3.2 Bitcoin 2013 through the Present
4
Figure 2 CC between BTC and NDX in the 2013-2020 period (Tradingview.com)
Figure 3 CC between BTC and NDX in the 2016-2020 period
5
Table 2 Daily CCs during first six months of 2020
6
7
Figure 4 CC between BTC and NDX in the first six
months of 2020 (COVID-19)
However, considering our benchmark, the correlation
between Bitcoin and the Nasdaq 100 Index continues
strong over the last six months during the COVID-19
period, as shown in Table 2 and Figure 4.
4. CONCLUSION
Since 2017, a stable and generally strong correlation can
be seen between the price of Bitcoin and the Nasdaq 100
Index. This is the key point that defines and values Bitcoin
(and other cryptocurrencies) as an asset with a trading
pattern similar to an asset on the Nasdaq 100, an index that
includes the best and most representative technology
companies listed in the US. However, the characteristics of
Bitcoin as a currency have not changed since its inception,
and its use as a medium of exchange continues to be
modest.
REFERENCES
[1] Baur, D. G., Hong, K., Lee, A. D. (2018)
Bitcoin: Medium of exchange or speculative
assets? J Inter Financ Markets Inst Money, 54:
177-189.
[2] Yermak, D. (2015) Is Bitcoin a Real
Currency? In D. K.C. Lee (Ed.), The Handbook
of Digital Currency, Elsevier. pp. 31-44.
[3] Damodaran, A. (2017) Bitcoin Boom:
Assets, Currency, Commodity or Collectible.
Musing on Markets.
http://aswathdamodaran.blogspot.com/2017/10/t
he-bitcoin-boom-asset-currency.html
[4] Kristoufek, L. (2020) Grandpa, grandpa, tell me the
one about Bitcoin being a safe haven: Evidence from
the COVID-19 pandemics. arXiv preprint
arXiv:2004.00047.
[5] Tradingview.com:
https://www.tradingview.com/scripts/correlation
coefficient/
[6] Evens, S. (1999) Support And Resistance.
Tech Anal Stocks Comm 17(1): 55-5
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