The is a statistical measure of the strength of the relationship between the relative movements of two variables. The values range between -1.0 and 1.0. A calculated number greater than 1.0 or less than -1.0 means that there was an error in the correlation measurement. A correlation of -1.0 shows a perfect negative correlation, while a correlation of 1.0 shows a perfect positive correlation. A correlation of 0.0 shows no linear relationship between the movement of the two variables.
Trade and Diversify with the CC indicator:
The correlation between two variables is particularly helpful when investing in the financial markets. By adding a low or negatively correlated mutual fund to an existing portfolio, the investor gains diversification benefits.
In other words, investors can use negatively-correlated assets or securities to hedge their portfolio and reduce market risk due to or wild price fluctuations. Many investors hedge the price risk of a portfolio, which effectively reduces any capital gains or losses because they want the dividend income or yield from the stock or security.
Bitcoin and CC:
A high degree of correlation between the equity markets and Bitcoin has existed, particularly in the last few months. In other periods, gold and Bitcoin appear to move in tandem. However, the correlation that should be watched the most is the dollar since the global economy is based on the strength or weakness of our world reserve currency, the United States dollar. Weaker USD drove up Bitcoin prices in Q2, Q3 2020.
The sudden impact of the global pandemic increased the demand for U.S. Dollars, surging heavily in March. This spike caused the other markets to tumble as the price of Bitcoin dropped by 50%, confirmed by the carts as the positive CC with NASDAQ and Gold and the negative correlation with the USDOLLAR . More interestingly is the fact that Bitcoin’s peak high is surrounded by the cycle low of the DXY index.
A Biden win and the USDOLLAR
The greenback is currently overvalued by 10% to 15% based on several reasons, according to Zach Pandl, co-head of global FX and EM strategy at Goldman Sachs. A drop on this scale would bring the dollar index to its lowest since late 2014. Furthermore a stimulus package and/or another lockdown will push the dollar even lower. We can use this information to plan a strategy for a correlation trade between BTC and other markets.
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Main sources - Investopedia, Cointelegraph, Business Insider