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  • Bitcoin’s correlation with gold sinks to two-year low, a warning for investors

    Bitcoin’s correlation with gold sinks to two-year low, a warning for investors

    Key Takeaways

    • Bitcoin’s correlation with gold is at a two-year low
    • Divergence highlights yet again that Bitcoin remains a risk-on asset
    • This may change in the future, but for now, Bitcoin resides on the long-end of the risk spectrum 
    • With full effects of tight monetary policy still to come, market should not get ahead of itself

    Bitcoin’s correlation with gold continues to fall, highlighting the oft-repeated goal of achieving a store-of-value status akin to digital gold remains a long way off for now. 

    We looked into this last month, when the correlation between gold and Bitcoin fell to the lowest value since the FTX collapse in November, an event which sparked mayhem in the crypto markets while the rest of the financial world traded quite placidly, including gold. 

    Since then, the correlation has continued to fall. Indeed, looking at the more volatile 30-day Pearson correlation metric, the relationship is approaching a near-perfect negative one over the past thirty days. The last time it dipped this close to -1 was over two years ago (it nearly hit this level post-FTX also). 

    While the prior metric is a little noisy and bounces around a lot due to the rolling 30-day window sample size, the next chart displays the same indicator but over a 60-day rolling window. Outside of the FTX collapse in November, the 60-day correlation is the lowest it has been in eighteen months, when Russia invaded Ukraine in February 2022 and sparked extreme volatility in the financial markets.

    What does this tell us? Not much, really, beyond what we already know: Bitcoin trades like a risk-on asset. That much has been clear over the past two years or so, as one of the fastest rate hiking cycles in recent history has pulled the rug out from risk assets. The Nasdaq shed a third of its value last year in what was the worst year for stocks since 2008. Bitcoin was far from immune, falling down to a low of $15,500 in the aftermath of the FTX collapse. 

    While the question over whether Bitcoin can decouple from risk assets in the long term remains one of the most intriguing, the numbers make it blindingly obvious that this has not happened to date. The pullback during last year’s bear market also emphatically strikes down any assumption that Bitcoin’s days of violent drawdowns were behind it (we are most definitely not in a “supercycle”), with the fall of over 75% from peak to trough being the fourth-worst in the last decade. 

    The recent dip in correlation follows a turbulent period in the crypto markets. The SEC sued both Binance and Coinbase, the two biggest exchanges on the planet, in the first week of June. Last week, Ripple secured a big win when a (partial) ruling on its two-year battle with the SEC seemed to imply it is not a security (although ambiguity does remain and there will likely be an appeals process). 

    These developments are obviously specific to the crypto markets, and with crypto not yet having a tangible impact on traditional finance markets, the turbulence did not carry over. 

    Additionally, the decoupling of gold and Bitcoin pours cold water on the theory that Bitcoin had already obtained its “hedge” status, which was spoken in some quarters as the asset rose amid the banking wobbles in March. In reality, while this price action was intriguing, it was likely more to do with the market pricing in a lower chance of future interest rate rises, as we discussed here. 

    “In a lot of ways, Bitcoin’s correlation with gold can be viewed as a progress tracker on the path to achieving the holy grail: an uncorrelated store of value for investors”, says Max Coupland, director of CoinJournal. “With this correlation dipping to a two-year low, it is clear there is a long way to go yet. Bitcoin remains highly susceptible to the whims of the stock market and the macro economy, and that is worth bearing in mind for investors amid the recent rise in crypto valuations”. 

    Remember, last year represented the first time in Bitcoin’s history that it observed a pullback in the stock market. Prior to that, it was humming along in the longest and most explosive bull markets in history, kicked off almost to the day when Bitcoin was launched (the stock market bottomed in March 2009, two months after the genesis block was mined). 

    All in all, Bitcoin is still trading like a risk asset, and it has experienced the pain of that label in the past eighteen months as interest rates have spiked aggressively. While it is up over 80% thus far in 2023, it remains 56% off its peak from November 2021. 

    Nonetheless, things are undoubtedly brighter today than they were nine months ago, when FTX collapsed and the world seemed destined for a gruesome recession. While that recession still may come (and indeed the prospect of lagged effects of tightened monetary policy loom large), economic indicators have been remarkably resilient while hopes of a soft landing have risen. 

    Personally, I fear the market may be getting ahead of itself, but what do I know? The sheer scale of rising from a zero-rate environment to a climate where T-bills are paying north of 5% is ferocious, and won’t be shrugged off lightly. Indeed, looking at previous cycles throughout history, the stock market has tended to pull back further after hikes have ended. 

    While past performance is never indicative of the future, it certainly should provide food for thought, as phrases such as “meme stock”, “altcoin” and “robinhood” creep back into the vernacular. 

    But whatever happens, the charts are clear: Bitcoin is still a risk-on asset. That means if the blood does hit the streets, gold will strongly outperform its digital cousin. Maybe that will change one day, but for now, the numbers don’t lie. 

    If you use our data, then we would appreciate a link back to https://coinjournal.net. Crediting our work with a link helps us to keep providing you with data analysis research.

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  • Bitcoin correlation with gold drops, highlighting risk-on nature remains

    Bitcoin correlation with gold drops, highlighting risk-on nature remains

    Key Takeaways

    • Bitcoin’s correlation with gold is currently at its lowest level since FTX collapsed in November
    • Our Head of Research writes that while one day Bitcoin may become a store of value, the numbers say it currently trades like an extreme risk-on asset
    • Bitcoin lost 76% of its value amid the pullback in risk assets once central banks around the world transitioned to tight monetary policy amid the inflation crisis
    • Meanwhile, gold traded flat and is currently close to all-time highs
    • Bitcoin’s correlation with growth stocks and riskier sectors of the stock market remains tight

    One of the ultimate bull scenarios for Bitcoin is that it morphs into some kind of digital gold. 

    For whatever reason, humans have been obsessed with this weird, shiny metal for thousands of years. Stories date back even further, but we have concrete evidence that gold was an important symbol of wealth in Ancient Egypt in 3000 BC, as well as part of everyday life and mythology. 

    Bitcoin, on the other hand, was not around in Ancient Egypt. Nor was it around for the Middle Ages, the Great Depression in the early 20th century, a World War (yet?), the inflation and energy crisis of the 1970s, and it even missed most of the subprime mortgage crisis of 2008. 

    In fact, Bitcoin was launched in January 2009, the Genesis blocked mined only two months before the stock market bottomed. Over the next twelve years, not only did the stock market recover, but it went absolutely bananas. Between the 2009 trough and the peak at the end of 2021, the S&P 500 multiplied 7X while the Nasdaq jumped nearly 13X. In other words, Bitcoin was launched into one of the most explosive and longest bull markets in history. Until 2022, it had never known anything but basement-level interest rates and up-only markets. 

    Gold’s hedge properties are what Bitcoin seeks

    Once 2022 came, risk assets sold off. The Nasdaq shed a third of its value; the S&P 500 fell 20%. Bitcoin had dipped plenty before, but make no mistake: this was the first time it was staring a bear market in the wider economy in the face.

     Despite certain enthusiasts claiming Bitcoin would act as a hedge asset, this did not happen. By the end of 2022, Bitcoin was 76% off its high. In the most explosive inflationary environment since the 1970s and Bitcoin’s first bear market, the asset was getting crushed. There was no debate: Bitcoin was trading like a risk-on asset. And today, it still is.  

    That is not to say that the narrative could flip in the future. Personally, that is what I view as Bitcoin’s upside: a store of value akin to gold. But while we can debate whether that may one day happen, it is unequivocal that Bitcoin currently trades like a risk-on asset. These are the facts of the case, and these are undisputed, to borrow Kevin Bacon’s phrase from the absolute classic that is A Few Good Men. 

    Gold, on the other hand, traded flat during 2022, and is currently trading close to all-time highs. 

    Bitcoin and gold correlation dipping

    For all the reasons discussed above, the correlation between gold and Bitcoin is particularly interesting to track. Using the 60-Day Pearson indicator, I have plotted it on the below chart. 

    Immediately, the past month jumps out. The correlation was a near-perfect 0.86 at the start of June, and had been around this level since late April. And then, it fell. It currently sits at 0.16, the lowest mark since FTX collapsed in November, sending the crypto market into a tailspin. But why?

    Well, I don’t really know. And that is kind of the point. Bitcoin, as it tends to do sometimes, is rising at the moment. Most likely, this is due to news of asset managers Blackrock and Fidelity filing ETFs, but maybe it’s just Bitcoin doing its thing. Perhaps it is merely bouncing back from the sharp fall it took after the Binance and Coinbase lawsuits were announced back-to-back two weeks ago. 

    But if we stretch out the time horizon on the previous graph, we see that the correlation between gold and Bitcoin bounces around a lot.

    It is challenging to put any pattern on that, to say the least. I thought I might try a different metric, so in the next graph I have used 90-Day Pearson instead of 60-Day. Predictably, the trend is less volatile, but there still appears to be no meaningful relationship here. 

    I think it’s pretty clear that assessing the correlation coefficients directly proves that there is zero positive relationship between these two assets. 

    Federal Reserve holds the key

    In truth, I believe this actually says more about gold than Bitcoin. Gold is in a funny place at the moment, trading more off expectations of inflation and interest rate movements rather than current conditions. The correlation between gold and the stock market is therefore higher than what we have typically seen in the past. This is why we are seeing gold often advance when soft CPI numbers are announced, or when dovish Fed comments surface regarding interest rate policy.

    If we step back and look at the big picture, it really is not complicated. Bitcoin has gone from $68,00 in November 2021, when money was cheap and risk assets were trading at outrageous valuations, to $15,500 last November, seven months into the swiftest hiking cycle in recent memory and the worst inflation crisis in 50 years. Then, it doubled to $30,000 as inflation numbers fell away and expectations around the length of the hiking cycle softened. 

    Along with all the fakeouts and reverberation in between, that is a hell of a lot of movement and clearly trading like an extreme-risk asset. Meanwhile, gold has been far less volatile, relatively range-bound between $1,600 and $2,000 for three years now. 

    Again, while Bitcoin may one day seize the crown of an uncorrelated asset, or a portfolio hedge to inflation, that is clearly not the case today. The below chart is the simplest method of all to show this, plotting Bitcoin’s hand-in-hand relationship with the tech-heavy Nasdaq composite since the economy transitioned to this risk-off, tight monetary policy period. 

    A few months ago, Bitcoin rose during the banking crisis, sparking some to declare it as decoupling from risk assets and the fiat world. As I wrote back then, this is nothing more than wishful thinking. Rather, it moved off expectations that the Fed would not be able to hike as aggressively in future if banks were going under due to the strain of these higher rates (indeed, soon after, the correlation rose back up).

    The latest dip in correlation with gold, falling back down from the ultra-high 0.86ish value it has been for six weeks or so, is similar. There is nothing ambiguous about the situation at the moment – Bitcoin is trading like a risk-on asset. It may one day claim that coveted title of digital gold, but right now it is nowhere near.

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  • Bitcoin’s correlation with Nasdaq 100 shrinks to 3-year low

    Bitcoin’s correlation with Nasdaq 100 shrinks to 3-year low

    • Bitcoin’s correlation with the Nasdaq 100 has fallen to just 3% in June, down from the overall 60% in 2022.
    • BTC price has outperformed the stock index year-to-date and over the past year.
    • Bitcoin price jumped to a year high last week after news of a spot Bitcoin ETF application by global asset manager BlackRock.

    Bitcoin’s correlation with tech stocks has declined sharply over the past few months, more so after the benchmark cryptocurrency’s rally to a new year-to-date price this month.

    According to an analysis published by market data research platform Kaiko released today, June 26, BTC has continued to break its correlation with the Nasdaq. 

    Kaiko researchers note that in June, Bitcoin’s and the Nasdaq 100 trading trajectory diverged to currently sit at just 3% correlation.

    Bitcoin outperformed Nasdaq 100 in June

    The falling correlation, according to Kaiko, has been enhanced by the cryptocurrency’s double digit gains in June.

    In this, BTC outperformed the tech equities’ 3%. While the Nasdaq 100 has gained about 35% year-to-date, its managed only 22% in the past year. BTC on the other hand is up more than 108% YTD and over 72% over the past year, even with the sell-offs occasioned by the collapse of TerraUSD and FTX in 2022.

    It’s a performance that has seen the lockstep trading witnessed in the second half of last year shrink from 60%, the Kaiko analysts pointed out. 

    CoinJournal analyst Dan Ashmore also recently looked at the fading correlation between the top crypto asset and stocks, examining the whys. 

    BlackRock ETF news major bullish catalyst

    On current outlook, Bitcoin has outperformed traditional risk assets even after a negative sentiment permeated the market following the US Securities and Exchange Commission (SEC) regulatory actions against Binance and Coinbase. Earlier, BTC had performed much better as stocks floundered amid the banking sector turmoil.

    And just this past week, as equities broke their winning streak on new macroeconomic fears, Bitcoin led the crypto market higher – fueled by news of BlackRock’s ETF filing. BTC currently sits around $30,260, down 1% in the past 24 hours, but still up by over 15% in the past seven days.

    CoinShares’ Chief Strategy Officer Meltem Demirors notes that together with BlackRock, companies with a combined $27 trillion in client assets are working to offer customers access to the crypto asset class.

    But while the Blackrock-inspired ETF frenzy remains a key bullish catalyst, other metrics such as open interest suggest growing inflows and speculation. Bitcoin bulls holding above the psychological $30k level or bouncing from fresh retest below that could form the next leg for BTC price upside action.

    As highlighted here, the $34k level is increasingly looking as the next major hurdle for BTC in the short term.

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  • Bitcoin correlation with stocks at 5-year low as regulatory crackdown takes toll

    Bitcoin correlation with stocks at 5-year low as regulatory crackdown takes toll

    Key Takeaways

    • Our Head of Research, Dan Ashmore, digs into Bitcoin’s relationship with stocks
    • Correlation between Bitcoin and the Nasdaq is at its lowest point since 2018
    • The Nasdaq is up 10% in the last month as stocks have surged off softer forecasts around interest rates and the macro climate
    • Bitcoin is down 9% in the same time frame, the US regulatory crackdown spreading fear about crypto’s future in the country 
    • Ashmore writes that the break in correlation surpasses what was seen in November 2022 amid the FTX collapse, when Bitcoin fell to $15,000 while stocks increased off positive inflation readings

    After ten consecutive interest rate hikes, the US Federal Reserve this week paused its rate hiking policy. The move was nearly unanimously anticipated by the market and movement after the meeting was relatively minimal.  

    However, over the past month, markets have been flying. The S&P 500 is up 6% in the last 30 days, now only 8.8% off an all-time high, despite being 27% below the mark in October. The Nasdaq is up 10% over the same timeframe – that is 15% below its all-time high from November 2021 but a tremendous resurgence considering it shed a third of its value in 2022.  

    And yet, something is being left behind: Bitcoin. 

    Bitcoin is now trading below $25,000 for the first time in three months. I put together a deep dive in March analysing the its underlying price movement to show how tightly it trades with the stock market. This was at a time when Bitcoin was rallying and banks were wobbling amid the Silicon Valley Bank fiasco. Suddenly, it was fashionable to declare Bitcoin as decoupling from the stock market. Ultimately, that wasn’t true. However, something very interesting has happened in the last month. 

    First, take a look at the path of the Nasdaq and Bitcoin since the start of 2022, which roughly coincides with the start of the bear market: 

    Clearly, the two have moved in lockstep. But two episodes jump out: the first is November 2022, when Bitcoin fell and the Nasdaq surged. The second is this past month. We discussed the 10% jump in the Nasdaq over the last month. However, Bitcoin has fallen 9% in the same timeframe. This marks a clear departure from what we would expect. Plotting the correlation (using 60-Day Pearson) shows this more directly:

    I touched on November 2022 above, and the swift fall in correlation can be seen on the chart. This was when FTX collapsed, sending the crypto market into a tailspin. At the same time, however, stocks raced upwards as softer inflation numbers were met by lower expectations around the future path of interest rates. 

    There were also less dramatic (but equally temporary) decouplings between Bitcoin and stocks in April/May 2022 and June/July 2022. On the chart below, I have pencilled in incidents which occurred during these periods:

    Indeed, what is different about November (FTX) and today is that we see a Bitcoin fall happening at the same time as a Nasdaq surge. While the Luna and Celsius incidents hurt crypto immensely, they came as stocks were also struggling and so the effect is not as dramatic in terms of correlation breaks (although is still tangible on the chart).

    But today, we are seeing the biggest break in the correlation trend over the last couple of years – surpassing even FTX. The 60-Day Pearson currently sits at -0.66, whereas the lowest it hit during the FTX crisis was -0.49. 

    Regulatory crackdown is suppressing prices

    The reason is obvious. The great regulatory crackdown in the US is freaking the market out, and for very good reason. The two biggest crypto companies on the planet, Binance and Coinbase, were both sued last week. 

    Crypto.com has suspended its institutional exchange, citing weak demand amid the regulatory woes. eToro and Robinhood pulled a bunch of tokens from their platforms following confirmation from the SEC that it viewed them as securities. Liquidity is dropping like a stone. 

    I wrote in-depth about the concern following the announcement of the Coinbase lawsuit last week, so I won’t rehash it here (that analysis is here). While I believe Bitcoin should be able to weather the storm long-term, the picture appears far murkier for other cryptocurrencies. 

    Make no mistake about it, the crypto industry faces a massive problem as long as lawmakers continue to turn the screw. The crisis very much feels existential for a lot of the crypto market. 

    Regarding Bitcoin, enthusiasts dream of a day when it can decouple and claim that title of uncorrelated hedge asset, or a store-of-value, akin to gold. I’ve done a lot of work around what that hypothetical future could look like, or what could lead the market to that point. But for now this remains just that: hypothetical.  Because while the correlation is at its lowest point in five years, it is not being driven by fundamentals and thus will inevitably spike back up. This is nothing more than the market reacting to what is a very bearish development around regulation in the US. 

    It’s not how investors hoped a decoupling would come. But if anyone doubted the market’s fear over the regulatory woes, or questioned why Bitcoin had not fallen more, looking at the break in correlation paints a very clear picture of how detrimental Gary Gensler’s games have been to the cryptocurrency industry. 

    In truth, it is not hyperbole to say that this is the most out of whack Bitcoin’s correlation has ever been whilst trading as a mainstream financial asset. Because back when it last happened in 2018, Bitcoin traded with such thin liquidity that its price action is largely irrelevant to draw conclusions from going forward. 

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  • Here’s why the Nasdaq 100 and Bitcoin correlation has faded

    Here’s why the Nasdaq 100 and Bitcoin correlation has faded

    • Bitcoin price has crashed by about $6,000 from its highest point this year.

    • Nasdaq has moved into a strong bull market because of AI.

    • The Federal Reserve will conclude its two-day meeting on Wednesday.

    Nasdaq 100 and Bitcoin prices have moved in the opposite direction in the past few weeks. The tech-heavy Nasdaq 100 index has soared to the highest level since April last year. In all, it has jumped by almost 40% from the lowest level this year. 

    Bitcoin price, on the other hand, has been stuck at the important support level at $25,200. It has dropped by more than $6,000 from its highest level this year. In the past, Nasdaq 100 and Bitcoin had a close correlation because they are often seen as high-risk assets.

    Regulatory concerns

    The main reason why the Nasdaq 100 and Bitcoin price correlation has faded is the ongoing crackdown in the United States. On Monday last week, the Securities and Exchange Commission (SEC) filed a major lawsuit against Binance, the biggest company in the industry.

    The agency accused the company of deceptive practices, commingling funds, and offering its services in the United States illegally. Then on Tuesday, the SEC filed a lawsuit against Coinbase, the biggest company in the US. It accused Coinbase of listing unregistered securities to American customers.

    The regulatory crackdown comes at a time when the crypto industry has gone through a challenging period. Last November, FTX, a major crypto exchange filed for bankruptcy, costing invetors billions of dollars. 

    Crypto companies argue that the SEC and other policymakers have not issued clear guidance about the crypto industry. For example, Coinbase questioned why the SEC allowed it to go public if it offered illegal products.

    Why Nasdaq 100 index is soaring

    On the other hand, the Nasdaq 100 index is soaring because of FOMO and the ongoing artificial intelligence hype. A closer look at the top movers in the Nasdaq 100 index shows that they have a thing to do with AI.

    Nvidia share price has jumped by more than 180% this year, giving it a market cap of over $1 trillion. Tesla, which is also investing in AI, has soared by over 110% while Broadcom, Amazon, and Palo Alto Networks have risen by more than 70%.

    Therefore, there is a likelihood that investors are rotating from the high-risk crypto industry to invest in stocks. Stocks are widely seen as being less risky than cryptocurrencies. 

    Still, there is a likelihood that cryptocurrencies will bounce back later this month as the regulatory concerns ease. As we have seen in the past, these cases tend to take years to conclude. 

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  • Bitcoin correlation with stocks rises again, normal service resumed

    Bitcoin correlation with stocks rises again, normal service resumed

    Key Takeaways

    • Bitcoin had deviated slightly from stocks over the last couple of weeks 
    • Correlation has bounced back since
    • Tech-heavy Nasdaq continues to trade in lockstep with Bitcoin as investors in both asset classes look to shifting expectations around interest rates 

    It’s been an odd few weeks in the market. The banking wobbles over the last few weeks, triggered by the bank run on the crypto-friendly Silicon Valley Bank (SVB), caused everything to go a little wonky. 

    One of the most curious aspects of this was a deviation from the normal Bitcoin/stocks relationship. Or, sort of. Bitcoin raced upwards while markets digested the banking news, with the correlation – at least on a short-term rolling 30-day metric – dipping as per the below chart. 

    The chart also shows, however, that the correlation has since come back up. 

    As I wrote in a deep dive at the time, we have seen these cases of temporarily dipping correlation a few times over the last year, most notably with the FTX crash in November, as well as the Celsius and LUNA crashes before it. 

    But in each case, the correlation roared back. The above chart shows that it is beginning to do the same again this time. And the chart below shows that no matter what you swing it, the relationship here is pretty close (and forgive the axis crime on this one, please). 

    What happens next?

    The interesting question is what will happen going forward. The key development recently has been with regard to expectations around the future path of interest rates. 

    The forecasts have been transformed. With hiking interest rates exposing the mismanagement of the aforementioned collapsed banks, the trouble has led to the market forecasting a pullback in plans to hike further. 

    Instead of future hikes, there are now cuts in the pipeline, or at least according to the probabilities implied by fed futures. 

    And it was the transition into this new interest rate paradigm, occurring last year as inflation began to roar and it became clear that central banks needed to act, which kicked the correlation up between stocks and Bitcoin. 

    It is not that one is controlling the other, it is that Jerome Powell is controlling both. Tech stocks are particularly sensitive to interest rates, given the sector is valued so much by discounting future cash flows – and a lack of current profit – which is why the correlation, and bloodbath in 2022, was so strong between Bitcoin and the Nasdaq. 

    Whether a potential pivot back off this uber-tight monetary policy sparks a deviation in correlation going forward is yet to be seen. Perhaps it will to a certain extent, but at the same time, it remains difficult to come up with a strong argument that Bitcoin is ready to truly deviate. 

    A decoupling remains the ultimate bull vision for the asset, and perhaps it will get there one day in the future. But there is not much evidence, beyond blind hoping by those in the sector, that this is imminent. 

    Over a multi-year time horizon into the future? That is anyone’s guess. But if the past couple of years has taught us anything, it is that stocks and Bitcoin are paired at the hip, especially tech stocks. The past couple of weeks, and the resumption of this trend, is actually more of a reminder of this than a proof against the theory.

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