3 months ago 2 min read

Bitcoin Correlations Show the Dollar Still Rules in Crypto Market Analysis (in the Inverse)

Bitcoin Correlations Show the Dollar Still Rules in Crypto Market Analysis (in the Inverse)

The U.S. and Bitcoin relationship Dollar Index reverts to normal, with macroeconomic forces still driving cryptocurrency values.

In recent weeks, we've made a point of highlighting the correlations between bitcoin (BTC) and ether (ETH) and various assets, as well as how much those relationships have held steady or evolved over time.

This procedure, which is also known as intermarket analysis, tries to shed light on potential price changes in one asset based on those in another.

The correlation coefficient, which ranges from -1 to 1, is used as the yardstick. A correlation value of 1 denotes a direct relationship between price and quantity, whereas a correlation coefficient of -1 denotes a totally inverse relationship.

Despite having different blockchain consensus techniques, total supply, and utility, bitcoin and ether have maintained a consistently stable price relationship, with a correlation coefficient above 0.9 for the entirety of November and the majority of December. The coefficient is at 0.85, which is still very high.

The connections between bitcoin and equities, metals, energy, and the U.S. are some of the other correlations we've been tracking. Currency Index (DXY):

The persistently adverse link to the DXY is notable, in addition to BTC's consistent association to ETH.

The 0.84 reading from November 19 seems to be an anomaly. For the majority of 2022, BTC and the DXY had inverse pricing relationships. This connection changed to be positive between November 9 and November 27, but this was primarily due to the collapse of the FTX.

The continuous inverse link between BTC and DXY and the consistently positive correlation between BTC and ETH offer opportunities for traders should those correlations deviate from their norms.

While BTC now seems set to trade flat, a change in the correlation could present a buying opportunity since correlations often revert to their mean.

Tracking the correlation between bitcoin and copper has been interesting; it reached a high of 0.9 last week. Since then, it has dropped to 0.41, raising concerns about its trustworthiness.

With the exception of a "black swan" occurrence unique to a centralized crypto organization, the price of BTC is still primarily tied to the American dollar. Financial choices made by the Federal Reserve.

With the Sam Bankman-Fried story starting to fade, Fed Chair Jerome Powell is once again posing as the main adversary of cryptocurrency, even if accidentally.

The lesson here is that market perceptions of Fed officials' words as well as inflation rates, the size of the Federal Reserve's balance sheet, and other factors will significantly influence the price of crypto assets.

Old-school markets and economics continue to have an impact on the development of a more recent asset class that can operate independently of conventional finance.

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