Bitcoin BullBear Correlation Analysis for Q1 2015
Mar 31, 2015 --- (ARCHIVED) BBA Articles
As the first quarter of 2015 nears a close, we wanted to take a look at a number of charts to see if we can glean some useful information going forward. This was triggered by our analysts noticing that many assumed correlations to other asset classes such as the US dollar and gold were actually empirically tenuous. What we found after putting together the data was that bitcoin in its current state is truly uncorrelated to almost every other major asset class in the financial world over the longer term, but can have very strong relationships in the near term( as logical or illogical as they may be).
When we take a look at the BTCUSD chart we do not see anything too out of the ordinary, other than a stretch of weak positive correlation as the dollar was bottoming in the summer of 2014. Since the dollar rally has begun, bitcoin has been strongly negatively correlated to the US dollar, unsurprisingly. We think the bitcoin bulls still had control of the market during the failed breakout of last summer, but quickly lost faith when the dollar began to shoot higher. In our opinion, it will be difficult for bitcoin to breakout of this downtrend until the USD run is over for good.
Next up is another common one, gold. Almost unbelievably, the relationship between bitcoin and gold is inconclusive. There are periods of strong positive and strong negative correlation, however there is nothing we can take away from this as it seems to shift randomly. We are sure its not random in reality, but we simply don't have enough information to posit an explanation for why this is the case.
Regardless, any persons claiming that bitcoin and gold are synonymous in the eyes of the market are stating an opinion at best, and are being downright untruthful at worst. That being said, given their economic properties and ideological underpinnings it would not be unexpected to see bitcoin and gold develop a stronger and more consistent positive correlation in the future.
If we are talking about gold, we might as well throw a chart of the worlds biggest commodity market in there for good measure. Crazy to think that over the past year oil has been much more correlated with bitcoin than gold, which is especially true when we look at the recent past. Bitcoin and gold are currently weakly inversely correlated, while bitcoin and oil are strongly positively correlated. We have no idea why this is, but we will not question the market's logic. Bitcoin bulls should keep rooting for a continuation of the rally in oil as it might bode well for bitcoin in the not too distant future. If it fails, then we should take heed of the macro warning.
Not that we would expect any statistically significant correlation to exist between stocks and bitcoin, but it has oft been proposed that they are very positively related so what the heck. This never made sense to us, and the market seems to agree as the results are inconclusive to say the least. The S&P 500 has been in a bull market since bitcoin's monetary inception, which leads to all kinds of data bias, but at least in the beginning there was a relationship. Currently there is neither a negative or positive correlation between stocks and bitcoin (notice the correlation coefficient is almost at zero!), nor do we expect one to develop, so we can pretty much disregard what stocks do when thinking about forecasting bitcoin prices.
Lastly we decided to throw bitcoin up against the mother of all asset classes at the time being, the US treasury market. We chose the most liquid treasury ETF of them all, which is the iShares Barclays 20+ Yr Treasury Bond ETF (TLT), for comparison purposes not only due to ubiquity, but also because the longer end of the curve is more economically informative than the short end (which is completely manipulated by the Federal Reserve).
Shockingly, the results were the most powerful of the entire series. For almost the entirety of bitcoin's modern trading life (since the fall of Gox), we can see a strong negative correlation between these two seemingly unrelated assets. Nevertheless, we judge the market on action, not conjecture, and can therefore conclude that for some reason these two assets have a very close relationship for market participants. Perhaps it has to do with risk-on/risk-off, or the drastic differences between bitcoin investors and sovereign bond investors, or maybe its pure coincidence.
egardless, we will be watching this chart closely for clues about where bitcoin might be headed later this year. If yields keep heading down, bitcoin will likely join them. However, if the Fed does raise rates this year and the long end starts to turn up, like many macro guys expect, then bitcoin might have a shot at a decent rally in 2015.
Happy Trading! Have a great BITday!
Disclaimer: Please always do your own due diligence, and consult your financial advisor. Author owns and trades bitcoins and other financial markets mentioned in this communication. We never provide actual trading recommendations. Trading remains at your own risk. Never invest unless you can afford to lose your entire