key takeaways
- Bitcoin’s Recent Bounce Has Survived As The Banking Sector Dragged The Stock Market Down
- This break in the correlation trend is a mistake, writes our data analyst Dan Ashmore, who says bitcoin remains at risk.
- Both the stock market and bitcoin continue to trade against interest rate expectations, in addition to isolated episodes of systemic risk aversion for bitcoin, the numbers show.
- The recent week shows a slightly softer correlation than usual, a less dramatic version of the price action around FTX and the 2022 Celsius drop.
- Our data suggests that normal correlation is about to resume soon
One of the major stories over the past year or two has been an incredibly tight relationship between Bitcoin and stock market.
We’ll get into the numbers shortly, but the mantra is that when the stock market goes up, bitcoin goes up more. When the stock market falls, bitcoin falls more. That is the bottom line. But is it still true?
Some market participants are starting to feel that this relationship is changing, especially given the events of the past week. Word “unrelated” A lot has been thrown in the markets, and now some are saying that bitcoin is making progress towards that situation. I’m not sure this is correct.
Correlation has been high since 2022 began
Let us first look at the price action since the beginning of 2022, which more or less marked the peak of the stock market.
I’ll go into more depth in the next section, but the best way to start estimating correlation is with the old fashioned eye test. Let’s start by charting bitcoin’s returns against the Nasdaq since the beginning of 2022:
It immediately becomes clear that there is a strong pattern here.
Before looking at the correlation coefficient, by looking at the related price action we can see that the asset has been in lockstep two (visually notable) periods apart. The first is August 2022, when bitcoin lags Nasdaq’s gains. It still gained, but was outperformed by the Nasdaq – unusual for a period of expansion. This was shortly after the crisis of contagion by Celsius (it filed for bankruptcy in mid-July).
Much more noticeable is the second period of divergence that bounces up – November 2022. Bitcoin fell as the Nasdaq rose on soft inflation readings and optimism on interest rate policy. Not only that, but it fell dramatically from $20,000 to $15,000. Of course, it was thanks to Sam Bankman-Fried and ftx collapseThe typical bearish shock for crypto was like Celsius.
Now let’s graph the correlation itself. I won’t go too deep into the math, but I’ve used the 60-day Pearson indicator and extrapolated it back to early 2022.
The results more or less support what we discussed above. For the uninitiated, a correlation of 1 means a perfect correlation (the word count of this article and the number of words I wrote this month, for example) while a correlation of 0 means no correlation (such as my word count per month). and the number of T-rexes seen in New York City).
Celsius and FTX declines are evident below, while other declines occur around the time of Luna (the stock market also fell around this time as we transitioned to higher interest rate policy).
correlation can be misleading
This shows correlation, but not necessarily causation. My old math teacher had a great way of explaining this difference. Shark bites and ice cream purchases may be correlated, but no one would argue that digging into a Ben and Jerry’s makes you more likely to be preyed upon by a great white shark.
instead, there is Secret variable. In this case, on sunny days, people are more likely to both swim and buy ice cream at the beach, and it is swimming rather than ice cream that makes shark bites more likely. have to swim Secret variable.
While that example is exaggerated (shark bites are extremely rare, if I’m stoking your fears!), the point is a good one. In financial markets, we have another latent variable. In fact, we have a lot of them – there are an imaginable amount of variables affecting the stock market – but the biggest one this past year has been the Federal Reserve and its interest rate policy.
It is not the stock market that is moving bitcoin, it is interest rate policy that causes both the stock market and bitcoin to move. And in turn, expectations about inflation have been a significant factor in interest rate expectations. This is why we have repeatedly seen large movements around CPI announcements and Fed meetings.
There is a saying, “The correlation of risk assets becomes 1 in times of crisis”. And when we transitioned to a new interest rate model in April 2022, when it became clear that inflation was too high, that’s exactly what happened.
All risk assets including both stocks and equities sold off. Bitcoin, being more volatile, of course sold higher. And since then, except for the above episodes, the correlation has held.
Is correlation falling?
The big question is whether this correlation is falling. Indeed, this is the ultimate vision for bitcoin. An unallocated store of value similar to the digital form of gold.
Some have looked at the price action of the past week or two and declared that this means we are seeing less correlation. But I think this is only a smaller version of what we saw during the Celsius and FTX “decoupling”. A short-term decline in correlation in response to a specific event.
Bitcoin sold heavily in the wake of troubles at Silicon Valley Bank (SVB), after the US administration announced it was stepping in to guarantee deposits.
On the other hand, the stock market also sold off, but to a lesser extent. And then yesterday with the banking turmoil in Europe, bitcoin held steady while the markets faltered. The announcement was that this must mean that the famous decoupling is happening.
I believe this is an illusion and I think the numbers agree.
Bitcoin sold off aggressively earlier as SVB was expected to have a crisis on the scale of Celsius and FTX, as Circle, the world’s second largest stablecoin issuer, USDC, has $3.3 billion in reserves in the bank (and the original The fear was that the number could be higher before it became clear).
So USDC fell below 90 cents on many exchanges. Obviously, the fall of USDC must have been painful for the industry and thus bitcoin fell to around $20,000.
While SVB presented an ominous threat to financial markets as a whole, the threat within cryptocurrencies was magnified due to the importance of USDC to the industry, especially after the halving of BUSD last month.
With 25% of Circle’s reserves in cash, bankruptcy was feared until it was clarified that only 8.25% of reserves were held in SVB, before the US administration stepped in to guarantee the deposits in any case. Picked up
Once this fear subsided, bitcoin recovered when the crisis came to light, reversing the decline. But the shares did not rise that much. It makes sense.
Furthermore, the price action was not dramatic and the supposed “decoupling” was hardly drastic. European banks were hit on Wednesday, but Thursday has seen a massive rebound, while overall, the stock market is doing fine, showing moderate gains.
Looking at the correlation metric, it has barely moved past the longer 60-day time frame, and is already bouncing back. The 30-day metric shows more movement, but as with any smaller sample size, is always more volatile and less indicative. Both metrics already appear to be bouncing back in any case.
Whichever way you swing it, a simple look at the chart mentioned earlier comparing the Nasdaq to bitcoin reveals all you need to know. Bitcoin is trading like a highly risky asset, and it is quite clear.
The trillion dollar question is whether this will change in the future. Could bitcoin finally break away from risk assets and establish itself as an uncorrelated store of value? Could this become a true hedge asset?
One day this may happen. But it hasn’t happened yet.