Crypto Market Commentary 

20 April 2020

Doc's Daily Commentary


The 4/15 ReadySetLive with Doc and Mav is listed below.

Checkmate's Corner

Bitcoin Correlations Part 2

Correlated or Uncorrelated?

The biggest lingering question is whether Bitcoin and crypto at large will continue to follow the stock-market in the event of another sell-off. My personal base case is that I feel the equities market has a way to go down yet. That said, I am also conscious that there is no use in fighting the Fed if the Fed wants markets to go up. The influx of freshly minted money is likely to push markets up to levels few expect them to go before further downside materialises.

Over the last month we have seen Bitcoin’s correlation with risk assets like the SPX shoot to new highs. Does this make Bitcoin a correlated asset?

Let’s put things into perspective. Bitcoin is 11 years old and over the course of that 11yr lifespan, it has had a correlation factor with Gold, equities and the VIX between -0.2 and 0.2. For context, fully correlated would be a factor close to 1.0 and perfectly inverse correlation is -1.0.

A value of plus or minus 0.2 means Bitcoin’s past is definitely UNCORRELATED.

We must also keep in mind that during a liquidation sell-off, everything is correlated. Gold, stocks, Bitcoin, Oil, Bonds…the whole lot was sold off through March. No asset was a safe haven during such times of uncertainty. It was all about the US dollar as ever other currency sold off as well.

So taking a step back, we have seen an increase in correlation over the relatively short timeframe of a few weeks out of 11yrs of history. Now if this correlation were to continue long term, perhaps we have started a new trend, but as of right now, it is more likely a case whereby margin calls just took no prisoners in March.

Coinmetrics also studied the correlation with SPX and noted that intra-day, it peaked on Black Thursday before dropping off shortly after. There has since been an uptick in correlation but still not up to the same level as during the sell-off. The chart below from Coinmetrics shows the spike in positive correlation over 2020 with the peak on 12-Mar.

As a final study, Coinmetrics established a distribution plot of the BTC-SPX correlation over the span of the last 365 days. What these charts show is that historically, BTC has a normal distribution centred around an average of zero for the SPX (shown in red). This means that under a statistical, probability framework, Black Thursday was an outlier and would be discarded as such in any quantitative analysis.

These distributions are justification that BTC may reasonably be considered an uncorrelated asset until additional data proves otherwise.

The last interesting insight from this chart, is the slightly higher weighting of the correlation distribution with Gold. BTC remains ‘uncorrelated’ to gold however certainly has a stronger positive correlation than for the SPX. Perhaps an indication of a store-of-value safe haven narrative forming.

Concluding Thoughts

We all know that markets can do whatever they want and we can only trade the market that is in front of us. The sell-off back in March was a great purge which removed much of the leverage from derivatives and mining markets.

From an on-chain and probabilistic perspective, I am confident in assigning an 80% probability that we have bottomed and the market has seen true capitulation from 2017. It would not surprise me if we get a significant pull-back alongside the SPX if/when selling resumes, but I also expect a decoupling alongside gold to be what comes next.

COVID remains an uncertainty and it’s effect on demand and financial markets likely has more downside. But with the magnitude of money printing that is going on around the world, inflation hedging and safe haven assets will be the word on the street. Bitcoin is neither just yet…but it has all the characteristics that make it the perfect candidate to evolve.

This cycle is where Bitcoin proves that it is worth its weight in salt…which the more I think about it…since digital…is not much. It is also expensive salt.


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