Chart of the Week: Is Bitcoin the best answer to portfolio diversification?
This week’s chart looks at Bitcoin’s correlation to the equity market.
This week’s Chart of the Week looks at research from Amy Arnott, CFA, a Portfolio Strategist at Morningstar.
She looks at three asset classes and their correlation to equity markets, with one being cryptocurrency. Specifically, Bitcoin.
She notes that as an asset that exists purely in digital form, cryptocurrency is fundamentally different from other major asset classes.
She takes a look at Bitcoin as it is the oldest and most established cryptocurrency. It also accounts for most of the investor interest and assets. However, there are numerous digital currencies have also attracted more attention from both retail and institutional investors over the past couple of years.
As a nontraditional asset, cryptocurrency has had an extremely low correlation with most other major asset classes. Over the past 10 years, bitcoin and other major cryptocurrencies have had a correlation of less than 0.4 when measured against stocks, bonds, real estate, gold, commodities, and other asset types.
But there are two reasons crypto may not make the best portfolio diversifier. First, as digital assets have attracted more interest from mainstream investors, correlations have generally trended up in recent years. For the trailing three-year period ended in April 2025, the CMBI Bitcoin Index had a correlation coefficient of 0.55 with stocks (as measured by the Morningstar US Market Index), but that was up from correlation numbers near zero (or even below zero) in some previous periods.
Second, crypto’s potential diversification value has been overshadowed by its extreme performance swings. Instead of acting like a noncorrelated asset, digital assets are mainly defined by their extreme volatility.
Over the past three years, bitcoin has been more than 3 times as volatile as stocks. Much of this volatility has been on the upside, but bitcoin and other cryptocurrencies have also been subject to extreme drawdown risk.
Between November 2021 and December 2022, for example, the CMBI Bitcoin Index lost nearly 73% of its value. More recently, ethereum has dropped sharply due to concerns about slowing network growth and competitive pressure from other blockchains that support smart contracts, such as Solana and Avalanche. Both bitcoin and ethereum have suffered several other large drawdowns in recent years, as shown in the table below.
You are able to find the rest of the Chart of the Week series here.
