Crypto Market Evolution: Decreasing Correlation with Equities and Growing Institutional Adoption

Decreasing Correlation with Equities

The cryptocurrency market has historically been heavily influenced by equity market trends. However, as the crypto market matures, this correlation is expected to decline. Citi Research strategists suggest that cryptocurrencies will increasingly move based on their own fundamentals rather than mirroring traditional assets. This shift is anticipated as the market becomes more mainstream and institutional adoption grows.

Regulatory Clarity and Crypto Volatility

A more transparent regulatory regime in the US is expected to reduce speculation-driven price movements and promote more stable, idiosyncratic behavior in crypto markets. While Bitcoin and other cryptocurrencies have shown high volatility, their integration into portfolios is likely to continue, with institutional investors playing a larger role.

Spot ETFs and Institutional Interest

Spot crypto exchange-traded funds (ETFs) have gained significant traction, driving strong returns in their first year. This trend is expected to persist as regulatory clarity improves and adoption broadens. Institutional investors are particularly poised to increase their involvement, further decoupling crypto from equity market movements.

Portfolio Management and Bitcoin Allocation

Research indicates that including Bitcoin in multi-asset portfolios can enhance returns, though it also increases volatility. Citi suggests allocations of 1-5% for Bitcoin, with strategies like price-based filters and quarterly rebalancing to manage risk.

Bitcoin vs. Ethereum and Inflation Hedging

Bitcoin and Ethereum currently share similar macro risk exposures, but their differing use cases may lead to divergence in the future. Additionally, while neither cryptocurrencies nor equities have proven effective as inflation hedges, trend-following strategies could still offer value due to speculative interest in crypto.