Is bitcoin highly correlated to other legacy asset classes? Is it risk on or risk off? tl;dr: we don’t know. More-so, there are several types of correlations to consider. It’s not simple, and it’s playing out live — as we are seeing some of the most severe risk-centric behavior in legacy markets in years.
The fed is cutting rates for the first time since 2008. Gold is catching a bid. The Yuan is losing 7.0 relative to USD — a multi-year breakdown. Stock Market sentiment is shaky; despite being at near highs, bond yields have been tanking.
So, is any of it correlated to Bitcoin? Is bitcoin risk off or risk on?
I think bitcoin is showing some evidence of being a hedge to currency wars, so in that sense, it can be risk-off to the dollar. Though relative to gold, it's the far more speculative asset. Sometimes, I like to think of it like a high beta version of gold. How about we just start showing some charts?
Bitcoin to Gold Correlation
Let's start with the one that should be pretty clear, Bitcoin to Gold. The Correlation Coefficient (CC) is a 90 day rolling correlation.
If you look at the trends, Bitcoin and Gold have trended similarly, but have adjusted positions at times on who is the leader. Bitcoin went much higher than Gold in 2017, fell more, and Gold bottomed first — leading to extended periods with inverse CC.
The recent correlation is strong.
Bitcoin to Yuan Correlation
The Yuan has been a big story. My theory is that the Yuan and Bitcoin are moving quite in sync — but only lately, especially as the Dollar/Yuan story has gained steam.
There are periods of severe inverse correlation there. But what we're seeing in 2019, like Gold, is a strong move together. I want to zoom in on the one hour chart as well.
I'm not looking for deep correlation here as much as impulses, which I think we can see quite clearly.
When the Yuan moves strong (devaluation against the dollar is an up move), Bitcoin is also moving strong. If I were to take this chart and apply it to the next move, I would say that whichever way the Yuan goes, bitcoin will follow. There is plenty of data (see late June) to dispute this bet; having watched bitcoin at that time, it felt euphoric and inside the cryptosphere. Whereas the move at the beginning of August felt responsive to global market mayhem.
This is obviously my own speculation. I don't have first hand evidence, but I do have friends who say they know people directly buying bitcoin in response to Yuan losing 7.0.
Bitcoin and Stock Market correlation
The stock market has correlated fairly consistently with bitcoin, but the divergences, when they occur, have been severe. Some of that is probably simply because both have gone up most of the time, and stocks kept going up (mostly) when bitcoin entered a bear market.
I personally think this is the least relevant correlation of the three, despite the consistency historically.
Bitcoin and Bonds Correlation
Let's see if Bitcoin has any correlation to bonds, specifically a US 10 Year bond here.
It's hard for me to make much of this, even though the inverse correlation has been strong this year.
Throw it all in there
For fun, let's put them all side by side.
The big move in USD/CNH and the big move in bonds stand out most.
Can we learn anything from all this? I'm not 100% sure yet. But I'm trying to figure it out. I'm not sure I'm ready to make conclusions from this chart dump. If forced, I'd say I will continue to focus on the correlation with the Yuan and Gold, and less so on stocks and bonds.