Cathie Wood’s explanation for the Bitcoin crash doesn’t add up

First of all, let me say that I really appreciate the work of the ARK Invest team, that I think their analysts are incredibly unique thinkers and that I have enjoyed learning from them over the years. years. But Cathie’s comment on bitcoin yesterday was easily, verifiable, and untrue and demands a fact-check.

Here is the explanation she gave today to my former Bloomberg colleague Carol Massar on why bitcoin fell:

“I think we’re in a risk-free period, for all assets. If you look at the stock market, the riskier or more volatile parts of the stock market have happened dramatically since mid-February, and I think that a lot Initially it helped bitcoin, because bitcoin is a very important inflation hedge … but I think what is happening now is because the stock market – the very volatile part of the stock market , the innovation part of the stock market – has undergone such a correction, which was ignited by fears of inflation, I think the correlation between volatile assets is going to 1 right now and that includes bitcoin. “

A risk-free period for all assets? Not even close.

The Nasdaq

NDAQ
has indeed been under some pressure, and inflation is certainly the talk of the city, but there is no widespread risk reduction in the market, according to data so far. Cathie argues that bitcoin is going down because investors are in a risk-free selling period and correlations between assets are increasing. Events like this happen, and the Covid sale in March of last year was a perfect example. This market is going through something very different today: a regular and specific selection process to eliminate transactions that investors believe will not work in a reflationary, growth-friendly economic environment. There is no sign of widespread panic. A ton of stocks are at all-time highs. What is happening is the result of deliberate selection, not panic.

Since it’s been almost exactly a month since bitcoin and the Nasdaq highs, I used 30-day correlations to gauge the veracity of his statement, and there is simply no truth to it. No unusually high correlation between bitcoin and the Nasdaq, the S&P 500, not with FANG, growth funds, chipmakers, not even the ARKK fund itself! The 30-day correlation between Bitcoin and all of these things rose to 1 in March of last year. Today, they are all between 0 and 0.5.

This is not even true if you single out the comparison with high growth companies as she suggests. In March of last year, Bitcoin’s correlation with ARK reached 0.97. Today it is 0.6. Last year, Bitcoin’s correlation with the SPDR growth fund reached 0.95; today is 0.51. Its correlation with the Nasdaq: 0.94 against 0.59 today. For the S&P 500: 0.97 versus 0.11. If the sell gets tough, could we get a high correlation sell? Sure, but that won’t explain why bitcoin has already been halved. This all still applies even if you are using short term correlations, say 10 days, where nothing unique is happening.

It also doesn’t matter which correlation length you choose. Since Cathie cited in mid-February, I have also looked at the 90-day correlations between “tech innovation” (ARKK)

ARKK
and bitcoin. The situation is on the decline, as ARKK started rolling first and has actually been stable in recent days when bitcoin crashed. Investors might choose to bail out innovation tech and bitcoin in the same general time frame of last quarter, but that has nothing to do with a sudden high correlation panic sell off in the markets. Nothing like that is happening. The best you can do is argue that bitcoin is a higher beta of some specific risky assets in the growth category, but that invalidates the other part of its claim that bitcoin is a hedge against it. inflation.

Here are the most important correlations. The correlation between value stocks and bitcoin, which reached 0.97 on the Covid sale, is currently at less than 0.2, its most inverse since the start of the pandemic. Bitcoin’s correlation with Treasury prices is also increasing, to 0.45, the highest since August. And more importantly, bitcoin’s correlation with gold is negative 0.79, the most inverse of all time.

Investors hate some things and love others. It is a choice, not a forced liquidation. People are choosing assets that they believe will thrive in the emerging reflationary post-Covid economy, and ARKK and Bitcoin are not making the cut. It takes 30 seconds to run these graphics. Why is she fooling investors?


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