TradingShot

BITCOIN The correlation with BONDS & STOCKS can deliver 20k soon

Long
BITSTAMP:BTCUSD   Bitcoin / U.S. Dollar
It has been quite a few days that I found out about this 'hidden' correlation of Bitcoin with Government Bonds (primarily) and Stocks (secondly).

The latter has been well known throughout the community already. BTC investors acknowledge that BTC isn't as detached from Wall Street as the radical crypto minds would like it to be, as in order for the crypto market to flourish, the stock market has to be on an expansion phase, in order to fuel with capital the riskier crypto assets.

But how do Government Bonds, which are a very low risk asset class, relate to Bitcoin? On this study, I have a short-term comparison (on the 4H time-frame) of Bitcoin against the 10 Year U.S. Government Bond on the left side of the chart and on the right Bitcoin against S&P500 .

As you see BTC and the US10Y are negatively correlated lately with every large drop on the 10Y resulting into a large rise on BTC . Does that mean that there is an inflow of bond money into BTC lately? Could be, even though it is rare to see capital being moved from such a low risk asset to a high risk asset.

At the same time BTC and S&P500 have their usual positive correlation but lately BTC seems to be less affected by pull-backs on S&P than usual. But every rise on S&P is amplified on BTC .

This could mean that Bitcoin can benefit tremendously in the next few weeks/ months (towards the end of the year) by those two correlations as every rise on S&P should see disproportionately higher gains on S&P , especially if the capital that leaves the bond market is directed to stocks ( S&P ) or even crypto directly.

Personally I don't want to see this as a paradigm shift (yet), meaning investors moving heavily from traditional low-risk assets to cryptocurrency but these short-term patterns can definitely take Bitcoin to its All Time High (~$20000) by the end of the year! Definitely keep an eye on the Bond Market the next few days/ weeks!

What do you think about that? Can Bitcoin benefit from those correlations? Is this a paradigm shift for you? Feel free to share your work and let me know in the comments section!


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Comments

Talking about correlation without actually calculating it left me very doubtful . I've run the figures and i got:

1Month Correlation 6Months correlation
Pair Last Average Standard Deviation Min Max Last Average Standard Deviation Min Max
XBT vs US Treasury note 10Y -24% -3.15% 30% 75% -75% -6% -2.27% 14% -41% 30%
XBT vs US Treasury note 2Y -23.41% -2.71% 31.41% -75.25% 77.50% 2.69% -2.53% 12.56% -30.93% 30.01%
XBT vs SP500 34.44% 11.30% 32.13% -83.85% 34.44% 42.11% 10.32% 15.64% -27.74% 58.70%
XBT vs GOLD 18.91% 4.02% 32.19% -73.14% 83.93% 47.54% 6.13% 18.44% -27.81% 55.20%

You can copy paste the above into an excel spreadsheet to have a nice clean table

What we can see is:
1/ There is NO correlation between bitcoin and rates over a long enough period of time. Average correlation is very close to 0% with a relative low standard deviation. However it is true that the LAST correlation 1Month between rates and bitcoin is quite low at Average minus a standard deviation (~-23%), but this is absolutely not statistically meaningfull, the correlation will revert back to 0 soon enough. If you plot the graph of the correlation over 10 years it is EXTREMELY clear that the correlation between bitcoin and rates is a WHITE NOISE.

2/ There is NO obvious correlation between bitcoin and SP500 on the long run. However since Feb2020 (rona crisis), sp500 and bitcoin are correlated at roughly 40% on the 6months scale. This is Average + 2 stand deviation. This can draw our attention and we can infere the correlation has significantly increased since the corona virus. HOWEVER, most of the asset classes are having a higher correlation since feb2020 (sp500 vs gold, sp500 vs US treasury notes, etc) => The rona crisis was a LIQUIDITY crisis, i.e a DOLLAR crisis, since every assets we are looking here is denominated against the dollar we have a higher correlation.

3/ Gold is showing the same behaviour as sp500. Abnormally high correlation since the virus. Even though we know Gold is UNCORRELATED from the equity market. This another argument in favour of the DOLLAR crisis explained in 2/

=> Conclusion: the short term (<1Month) correlation you are seeing is merely a random noise. The longer term correlation (>1Month) is skewed by the residual from the liquidity crisis. Bitcoin is and remain an uncorrelated asset, dont try to trade based on this trading idea explained by Tradingshot.

Disclaimer: I am long bitcoin, and beleive it will reach 20k by dec as well, but for a totally different reason (scarcity)
+15 Reply
@henribu,
Absolutely correct. Gold and bitcoin are correlated because they are alternative investments, i.e. not correlated with the business cycle. IMO the action we have been seeing (Gold up, BTC up, SPX up), is people getting drawn into the market at its peak (so others can get out...), while others are rushing to safe havens because they know a crash is coming.
+2 Reply
wellxsantos UnknownUnicorn3809107
@UnknownUnicorn3809107, bitcoin will get a big sell out in max 2 weeks, dropping to 11k leves
+3 Reply
CRYPTO-KiNg-66 wellxsantos
@wellxsantos, just curious, is that a hunch do you have any technicals to back that up? I could care less if it goes up or down as long as I’m betting the correct way. There’s a lot of bull talk these days, I’m always open to new ideas if they make sense
+3 Reply
karl_jr CRYPTO-KiNg-66
@CRYPTO-KiNg-66, source: his rear end. Unfortunately people don't understand this, markets don't react the way you expect.
There is considerable noise about BTC. Kids like to believe that it will moon just like 2017 so that they can sell at the very top. While this will not happen, I don't see BTC going back to the 11k levels any time soon.
Oh, and my source? Yes my own rear end :)
+2 Reply
henribu wellxsantos
@wellxsantos, or maybe it will shoot up to 25k, who knows? Bitcoin is being... bitcoin
If history is repeating (and i think it does for btc, i see a lot of fractals on the log chart) you might expect at any time a 30% pullback during this bull phase. Those are the pullbacks we are all waiting for to buy more coins
+2 Reply
@wellxsantos, Zoom out...
+1 Reply
TradingShot UnknownUnicorn1495183
@UnknownUnicorn1495183, Great fractal find.
+1 Reply
Trading-Guru UnknownUnicorn1495183
@UnknownUnicorn1495183, Or, Zoom in and find this set-up to $17,000:
+1 Reply
@henribu, 1) As I clearly mention, my study focuses on the correlation on the VERY SHORT TERM, which as you see on the chart covers the past 15 days. Your data is medium to long term (1-6 months as you say).

2) Noise or not, the correlation is there and no matter what explanation we give to this phenomenon, it is a pattern which I did very well for sharing it with TradingView's community.

3) All points you mentioned regarding COVID, liquidity, correlation with Gold/ S&P are valid and already well known among the community.

4) I am very bullish on the short and long term on BTC and my charts here show it.

5) Thank you for your valuable contribution to our community.
+1 Reply