With bitcoin at a critical juncture in regard to both price and time, we return to our correlation analysis to see if there is anything we can glean from the macro picture. There have been some interesting developments over the past month, however many of the trends identified in our previous report are holding true. That said, we did add another market, the ETF proxy for China (FXI), due to the fact that China's stock market has been on a tear lately and bitcoin remains very popular there as well.
In general, bitcoin continues to exhibit independence in relation to almost all other major legacy asset classes. If this persists, then it could be valuable simply as a global hedge which would be very good for bitcoin over the long term. We do not see any reason why this shouldn't be the case given how unique and misunderstood the cryptocurrency is.
No surprise that bitcoin found support just as the US dollar was topping out, but that may be more coincidence than correlation. Following a nasty double top around the 101 level, the dollar has been moving consistently to the downside for about six weeks as bitcoin continues to consolidates in the 220 to 240 $ range. You can see that until recently the negative correlation between bitcoin and USD was strong and persistent, whereas over the past two months that relationship has almost evaporated.
Despite the fact that bitcoin is typically referred to in USD terms, this chart continues to show that bitcoin is likely not beholden to any one fiat currency and is instead constantly reacting to many currencies at once. This is made possible by the fact that bitcoin can be easily, quickly, and safely transferred to other exchanges, hence make arbitrage between the fiats much easier than it would be conventionally.
Gold and bitcoin remain slightly negatively correlated, but we cannot get much useful information out of it as the amount is statistically insignificant, and history shows that there is no long term relationship between the two "hard" assets. While we expect them to exhibit positive correlation through time as bitcoin matures, gold is still in another league with regard to audience and liquidity. This will remain the case until large global institutions are involved in bitcoin (either directly or indirectly), which we do not expect for at least another year to two.
Surprisingly bitcoin has been more closely correlated to oil than gold over the past 5 months as they have had a positive relationship. This is most likely a statistical aberration as we don't see why these two assets would be so closely related, but perhaps it had to do with these two markets being risk proxies for the financial world. Regardless of cause, we expect the current trend of returning to a neutral correlation will continue for the foreseeable future.
We continue to hear the "bitcoin follows stocks" narrative floated around the interwebs, but the data continues to squash that notion. US stocks have not had a real correction in YEARS so they seem to be going up regardless of what is happening elsewhere, especially in bitcoin. In fact, US stock have been in the current bull market since bitcoin's inception so any relationship should be taken with a grain (or two) of salt.
The correlation coefficient is now almost at zero, making it the least related to bitcoin's price of any markets included in this analysis. This should continue as any perceived correlation is just that, and rightfully so.
If US stocks are the least correlated market to bitcoin, what about the Chinese stock market? China has a large bitcoin trading community and has also been in a massive stock market rally this year, so we wanted to see if money was flowing into stocks at the expense of bitcoin. While historically the two markets have not had any persistent or significant relationship, recently it seems as though one is forming as the negative correlation has been strong for the past few months.
It makes sense that some money is going into stocks as opposed to bitcoin, but we don't think the correlation will persist once the bubble pops. In order to get a better idea of what the true relationship is between bitcoin and Chinese stocks, we will need to see what bitcoin does that occurs.
We once again save the best for last as the strong negative correlation between bitcoin and US Treasuries remains intact. Despite have weakened slightly over the past few weeks, the relationship is still well within the historical range and remains convincing. As long as a 10-year US Treasury is the go-to fear proxy for the global markets, bitcoin should continue to act inversely of them. It seems clear to us that bitcoin remains one of the most volatile, and hence risky, investments/assets within the financial sphere so it should be no surprise that is moves in the opposite direction from bonds.
We know that the idea of a risk free asset is asinine, but until that perception is shattered this relationship should persist.
Until next month!!!
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