TradingShot

BITCOIN The day it became fully correlated with S&P500

BITSTAMP:BTCUSD   Bitcoin / U.S. Dollar
With this title you might be wondering what Bitcoin has to do with the Standard & Poor's 500 ( S&P500 ) stock index. You think that Bitcoin and stocks are not correlated? Think again as there is a correlation and indeed a very scary one.

Basically I should rephrase the title to "The WEEK it became fully correlated" as I am looking at this week's sell-off that took the cryptocurrency world (and not only) by storm and, as I will show you, has EVERYTHING to do with the panic selling on the stock markets. Circuit breakers, national emergencies and a ton of other panic headlines that have been hitting the news, the effect of the Coronavirus was largely underestimated by most of us. It really goes to show how the real economy and the cryptospace are two pieces of the same mechanism.

On this study I will bring forward a scary correlation of Bitcoin and S&P500 that I came across while using the moving averages. The result is striking and I am sure will leave many shocked at how similar the price action of the two financial assets has been all along and was always there but couldn't see it.

** The 1W MA200 and MA300 **
First of all let me begin by saying that the use of the 1W chart is best suited for this kind of comparison as it allows to go a few years back in the timeline and stretch the Moving Averages. I am using the 1W MA200 (displayed in orange) and 1W MA300 (black trendline) which reveal the following:

- The MA200 has been providing support to both BTCUSD and S&P500 (for S&P in the last ten years for BTC as far as the trend line goes). As you can see on the chart, it supported BTC in mid 2015 on a multi-month span while S&P in Jan/Feb 2016. Then things get really interesting as the trendline made contact with both BTC and S&P on the exact same times: the December 2018 lows and now on the current weekly candle, which of course as we know broke through. The key however on this move is this: for S&P the candle's wick retraced back above the MA200 and closed the candle above it. We have seen in 2015 that when that happened on Bitcoin (1W candle closing above the MA200), the downfall was contained and gradually started building an uptrend. It is therefore important to see the current 1W candle close above the MA200 now.

- The MA300 is the level where this week's candle both on BTC and S&P found Support. This goes to show just how correlated the two have become during this time of crisis. The price almost hit the MA300 level and rebounded making that long wick, which on S&P closed above the MA200 and on Bitcoin it remains to be seen. It needs to be said that the MA300 has never been touched on Bitcoin while on S&P500 the last contact was in December 2011.


** Approaching the December 2018 low on both **
Another interesting development is that the current sell-off has come to close to the December 2018 lows both on BTC and S&P . Almost causing a Double Bottom formation. Double Bottoms are considered to be bullish patterns but of course that remains to be seen. It would be much better for both just to sustain trading above the 1W MA200/300 zone.


** Do not hope for a new recession **
As a conclusion I would like to point out that the above similarities show that Cryptocurrency is as real of a financial asset as anything in this world and people (especially under times of panic, geopolitical unrest and other crises) treat it as such. Human psychology in states of fear (or equally euphoria) is identical both when trading stocks and cryptocurrency alike. And the more institutionalized Bitcoin gets, the more often we will see it correlating to Wall Street behavior. I think Bitcoin buyers learned this week that expecting a new global recession and meltdown of the financial system in hopes that it will boost Bitcoin's price, won't do any good. Bitcoin has of course the capacity to outperform S&P500 and any other traditional asset in the coming years, but will be affected just as much by a global recession as investors will be liquidating their assets in fear.


I hope you enjoyed this comparative analysis and helped you put this week's sell-off into perspective. But what do you think? Do you believe this correlation can serve as a benchmark on how we should be treating Bitcoin like in future crisis events or you believe it is only a temporary similarity? Let me know in the comments section!

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Comments

Great analysis. If I can add, one reason Bitcoin and the S&P (and gold too, for that matter) all became correlated lately is because of forced liquidation. As the S&P tanked, more and more investors (both institutional and retail) were faced with margin calls. So many of them needed to raise cash quickly by liquidating. And usually they begin with their portfolios' largest winners first. Both BTC and gold were going up pretty strongly into the end of February. So when the S&P really started to sink from late Feb until recently, BTC and gold were the focus of much liquidation.

This, to me, is a good sign, however. It means the BTC wasn't sold because it's no good. It hasn't lost its market. It just happened to be caught in a temporary selling frenzy that affected other assets as well. Thus, the recent selling is really not due to any breakdown in fundamentals. When this ordeal is finally over, we can expect BTC to get back to where it was before along with equities. But of course, BTC will continue climbing with greater impetus than equities over the longer term.
+60 Reply
TradingShot WorthAShot
@WorthAShot, I couldn't have said it better myself. This is basically the message I am trying to push on this article. BTC (front-runner) profits were liquidated in order to get back to the crisis safety of cash (hence the enormous spike on USD) which is still the central mode of payment. BTC is far from 'dead' and will again outperform its rival asset classes at the end of the year.
+23 Reply
alienteck TradingShot
By that logic then since BTC is so much lower now, hardly anyone has profits and there should not be any selling left.. But since the markets are still so over valued that even dropping another 50% wont see any value in it. So BTC can go to 2k or 1k.. Since S&P will drop like a rock as soon as the FED runs of the trillions they been using every week to keep it up and if this is the effect of that imagine an implosion when they dont. The good thing is, they can use inflation to balance things out.. Stocks wont drop since inflation is high.. On the other had there can be deflation.. Even with massive printing, if people wont spend anything, nothing can be gained by printing ever more fiat.
+8 Reply
Imio alienteck
@alienteck, Gold could continue to take a beating as well for the same reasons, the snap back when the CBs finally dump enough liquidity to float the market should be crazy though.... fully expecting widespread helicopter money before this is done and heck we might see negative interest rates in the US by the end of the week.
+1 Reply
We saw negative interest rates in Europe and nothing happened. People still hording money. Majority of people still can not buy BTC. Not only that but they dont understand it. Means Gold will still be favored. For BTC we need a modern advanced society to work in. Like being able to sell paintings for millions, we need someone else advanced enough to recognize its value. Remember in WW2 even with constant bombing and destruction, some people were hording paintings.. But you could not get much for them. You could get food for gold though.. Same scenario..
+4 Reply
@Imio, The Fed already made their move yesterday. Let's see if they move for another blow this week. Negative interest rates in the U.S.? Seemed like a joke a while ago.
+1 Reply