Correlation of Bitcoin with Traditional Markets

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Aug 6 . 10 min read

During a long time, cryptocurrency market was independent from the traditional financial sector. But in 2016, the first data appeared, indicating the correlation between gold and bitcoin. This was due to the spread of bitcoin among users: before that price was moving chaotically, so there was not enough statistically significant data to assess the correlation. The market lacked participants, so its character was more manipulative than natural. Crypto community representatives position Bitcoin as the asset that least correlates with the traditional financial sector, and as a result, cryptocurrencies are seen as an alternative to established stock market assets.

Exchange charts over the past few months show that the price movement of the major cryptocurrency was close to the gold price movement and was backward dependent on the stock market. In other words, Bitcoin positively correlated with gold, and negatively with stock indices.

Correlation means that there is a tendency to move in the same or the opposite direction during a certain period of time. The value of the correlation varies from -1 to 1 — lower and upper limit accordingly. The unit indicates that the movement of assets repeats each other completely. The lower boundary indicates the opposite: prices are moving in opposite directions. The closer the correlation value is to zero, the weaker is the correlation, and the zero value indicates that there is no correlation.

Crypto enthusiasts, analysts, investors, and regulators have been actively discussing how to classify the digital currency Bitcoin, and for a long time couldn’t come to a consensus. Bitcoin was compared to currency, product, and investment asset. Others pointed out that the main cryptocurrency is unsecured and has no base value.

But eventually, regulators came to a consensus and described Bitcoin as a product and equated it with gold. Therefore, there are all preconditions for correlating the movement of Bitcoin and Gold. The crypto community is following the same opinion: there is also the term “Digital Gold,” which is firmly established in the Internet community. It was mentioned by analyst Mike McGlown in his interview with Bloomberg. In his opinion, Bitcoin is ripening and the ground is ready for its formation as a digital version of gold. As a confirmation of his words, the analyst refers to the reaction of Bitcoin to the recent precedent in Iran. After the U.S. military drone attack and the death of Iran’s senior military leader, Bitcoin reacted in a timely manner, which may serve as evidence of the assumption that a digital asset is maturing.

The dependencies between these two assets are preceded by other factors. If we go deeper into the analysis, we can see general characteristics of gold and bitcoin:

  • Resource limitation. Like gold, Bitcoin has a limited issue, as opposed to fiat currencies, which governments can issue in unlimited quantities, thus reducing the purchasing power of money and controlling inflation.
  • The process of extracting bitcoin and gold, known as mining, requires certain costs, both resource and financial. It’s the complexity of extracting both assets that make them so valuable and scarce. So, you can’t just print them out or bypass the mining process.

Statistically significant can be considered the period since the beginning of 2019, when the correlation between gold and bitcoin began to strengthen and became most active against the background of a tense economic and political situation in the world.

Chart of BTC and GOLD course correlation.

The chart shows a strong correlation between the two assets. In certain periods, the correlation coefficient is close to one and reaches a value of 0.91, which indicates almost a direct relationship between the assets.
As we have already said, the correlation is most pronounced at local peaks, so let’s look at different periods and compare the BTC and GOLD charts to see how strong the correlation is between these assets.

May-June 2019

During these two months, the Bitcoin price demonstrated the fastest growth in 2019. The price rose from $5269 to $13858 in less than two months, reaching its annual high. It’s necessary to note how the chart of the gold rate coincides with the chart of the Bitcoin. Over the same period, gold starts to rise actively in price and reaches a 6-year high — $ 1423. During this period, there is a strong correlation between the BTC price and GOLD, which means a direct correlation between the two assets on the background of increasing trade confrontation between the U.S. and China.

BTC and GOLD course correlation chart for May ? June 2019.

After a short correction, when the bitcoin price fell below $10000 again, the rate quickly recovered and reached $12000. At the same time, the gold price rose, reaching $1506 per ounce. The main reason for the relationship was another sharp deterioration in the negotiation process between the U.S. and China, both sides announced the introduction of new import duties.

Correlation chart of BTC and GOLD rates for August 2019.

FED’s monetary policy, which makes it clear that the U.S. economy isn’t in a better position, has increased investor interest in gold, resulting in the best growth dynamics since 2010 and reached the levels last seen in 2013.

Against this backdrop, the conflict between Iran and the US has intensified and there is still uncertainty about the US-China trade wars and the upcoming US presidential elections. The situation with China is aggravated by coronavirus outbreaks, which worsen trade relations with China. This leads to confusion, and analysts disagree on the fall in bond yields in 2020, according to a survey by The Wall Street Journal.

Along with developments in the traditional financial sector, the crypto market is also on the edge of key changes. In May 2020, an event is expected to affect the sphere of the cryptocurrency — halving the award for new blocks will be halved, i.e. issue of new BTC coins will be reduced by 50%. If demand persists, the halving will have a positive effect on bitcoin price growth.

Correlation chart of BTC and GOLD courses in early 2020.

Since the beginning of the year, Bitcoin’s price has risen to $10400, and gold once again updated its high of $1689 per ounce over the year. Investors have once again turned to the metal market and cryptocurrencies under difficult political and economic conditions, accompanied by a potential termination of yield on U.S. bonds, which caused an increase in assets, which have become a refuge for stock speculators.

The well-known Bloomberg publishing company notes that the correlation between assets is stochastic. Since August 2018, 49% of the time during the year there was a negative correlation between gold and Bitcoin. The uptrend coincided with 22% of the time, and prices in tandem with 29% of the time. But the trend has changed significantly. BTC and Gold are now trading in tandem at 58% of the time. However, Bloomberg warns that such a short period of time doesn’t allow collecting enough objective data to assess the dependence, so we can’t say that the correlation indicates a causal relationship.

Due to the above factors, the concept of “Bitcoin — Gold” is becoming more and more obvious. The presence of the correlation itself has no statistical significance, but it reinforces the view that Bitcoin can become a tool for saving or storing along with gold, for example, in the market for digital assets. Digital Asset Data president Ryan Alfred stated that the results indicate the transformation of Bitcoin into a means of saving and makes it potentially suitable as a safe asset in the unstable global economic situation in traditional markets and, of course, in the market of digital assets.

In a period of market uncertainty, assets such as Bitcoin and Gold are treated as hedging instruments. In periods of positive economic sentiment, investors are returning to traditional markets that show strong growth in quotes.

When comparing the Bitcoin and S&P 500 price charts, it can be found that there is a strong correlation between the markets. Moreover, it’s noticeable that periods of active growth of Bitcoin and index mostly coincide. The S&P500 reflects the general state of risk assets, which more often include Bitcoin. However, if the Bitcoin moves equally with gold during periods of economic and political “disruption”, then with the stock market, the movements are more likely to just coincide, rather than to have a specific connection.

BTC and S&P500 course correlation chart.

This season can be divided into two periods conditionally: “May” and “June”. During the first period in May, the negative correlation was strongly pronounced and reached -0.73. While the May stock market was falling, Bitcoin showed rapid growth. The fall of the index was caused by US President Donald Trump’s policy towards China: he planned to raise duties on Chinese goods and urged American companies to remove production from China. Investors decided to leave the stock markets and went into gold and Bitcoin, but if gold acted as an asset shelter, then Bitcoin as an alternative risk asset, which gives an opportunity to earn instead of the falling stock market.

BTC and S&P500 course correlation chart for May ? June 2019.

At the same time, the Bitcoin price moved into an early stage of upward growth and reached a new annual high, which will more than double the price since the beginning of the year. In the first period, in May, Bitcoin rose by more than 60%, while the S&P500 fell by 7%. The May chart shows that Bitcoin was used by investors as a hedging asset against the S&P500 index.

In June, the situation was quite the opposite. Against the background of the agreements between Beijing and Washington, the stock market began to recover and by the end of June regained lost positions. Bitcoin, at the same time, continued to grow and by the end of June reached its maximum since the beginning of the year.

In the first 10 days of August, Bitcoin together with gold rushed up and reached $12,000, while the stock market went down as a result of another Trump’s strike against Beijing. Further, the stock market was in a sideways trend for almost 3 weeks, after that it started to grow again and didn’t decline significantly until the end of the year, reaching a historic high. Bitcoin, in its turn, began to gradually decline and by the end of the year reached $7300, losing almost everything that “earned” since mid-May.

Correlation chart of BTC and S&P500 courses for August 2019.

Head of Management of Morgan Creek Digital, Anthony Pompliano said that investors tend to hedge risks to the U.S. dollar. According to him, in August 2019, Bitcoin remained an uncorrected asset. Manager of Fundstrat Global Tom Lee has the opposite opinion and believes that Bitcoin moves together with traditional markets, so he will update its maximum when the S&P500 index does.

BTC and S&P500 course correlation graph in early 2020.

Since the beginning of 2020, there has been a long positive correlation between S&P500 and Bitcoin. Both assets grew during this period: Bitcoin grew by 44% in peak, while the index showed growth of just over 4%. The U.S. Federal Reserve has added $210bn to the market in recent months — the amount exceeds the capitalization of Bitcoin. This has served as the basis for growth and made assets such as Bitcoin, indices, and gold more attractive for investment.

It’s worth noting that at the end of February the decline in Bitcoin coincided with the decline in stock prices. The reason for that was the threat of a pandemic: the U.S. market went down after Asian and European markets after the data on coronavirus distribution was updated.

As a result, if the movement of gold and Bitcoin coincide during periods of tension, the coincidence with the stock market is random. In May and August 2019 they are quite opposite and not connected, in June 2019 and early 2020 they are almost identical.

Although Bitcoin is positioned as a decentralised and alternative asset, independent from the traditional financial market, recent data indicate a clear correlation and capital flow between the traditional and cryptocurrency markets. However, at the moment it’s difficult to determine the purpose of investors who buy Bitcoin. As a security asset, like gold or as an alternative risk asset, in order to make a profit instead of the stock market? Yes, periodically there is a logical correlation, but still more often with gold, especially in the last couple of years. Probably, it’s Bitcoin and other cryptocurrencies that can become a new “refuge” for investors during the expected financial crisis, we have already written about it before. At least there are no other assets that would allow earning during the crisis while being independent from traditional markets.

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