jakiro
Author: ECOINOMETRICS
If you pull out from the volatility of the major asset classes every day, you will find a big trend.
This trend connects Bitcoin, gold and leading companies that play a major role in the stock market, and it is affecting everything downstream.
This is the overall situation we should pay attention to.
one,Important points
This week we will not look at short-term correlations, but look at the long-term.What we learn when we look at the big picture:
Bitcoin’s price trends are closely related to gold and Nasdaq in the long term, which is mainly driven by global liquidity conditions.
Many crypto assets, miners and related stocks follow the trend of Bitcoin.Investing in these assets is actually betting on the direction of Bitcoin.
Financial conditions in the United States are relaxing, creating a favorable environment for Bitcoin and related assets.
Current liquidity supports Bitcoin, but a potential U.S. recession remains a key risk to focus on.
Understanding these long-term trends and macro correlations is crucial to effectively navigate the crypto market.
two,Looking at macro correlation
Since we started this relevance report, I have generally focused on shorter time frames.For us, “short” means monthly size, so we usually study the correlation changes within the 1-month rolling window.
This approach helps identify potential turning points, but also brings relatively high noise (so some guess is required in the analysis).
Sometimes it is worth looking at the long term to better understand long-term trends.
About 15 years ago, when I first entered the quantitative business, I could still find information advantages in a short time frame.But over time, these advantages have become increasingly difficult to capture, and I think that having a deep understanding of the overall situation of long-term trading is the real advantage.
So today, I decided to adjust some parameters to study the changes in the trend similarity scores of Bitcoin and several “macro” assets in the 1-year rolling window.
This approach helps ensure we don’t see trees and forests and provides us with a clearer overall picture.
This is the result.
As a reminder, a trend similarity score near 1 means that the trend direction of both assets is the same, while a score near -1 indicates that they are in the opposite direction.
Is Bitcoin greatly affected by the US dollar’s strength and weakness fluctuations (DXY)?Not.Trend similarity scores fluctuate only between positive and negative values.
Is Bitcoin related to interest rate changes?Also not much impact.The trend correlation we see is similar to the pattern of DXY.
However, when you look at gold and Nasdaq, you will find a more consistent relationship.Especially since we have passed the recent bear market, the connection between Bitcoin, gold and Nasdaq has been very close.
This is no coincidence.There is one common factor that links these three: global liquidity.
Global liquidity drives these assets by affecting risk appetite and investment flows.The loose monetary policy not only improves risky assets such as Bitcoin and technology-based Nasdaq stocks, but also improves gold as a hedge against potential inflation.As liquidity fluctuates, these assets tend to move simultaneously, reflecting a wider economic situation and investor sentiment.
This will have a downstream impact.
three,The downstream effect of Bitcoin
Here we are talking about correlation, not potential causality.
However, it is fair to say that we can divide the world into leaders and followers.
For example, global liquidity is the leader and Bitcoin is the follower.Or Bitcoin is the leader and MicroStrategy is the follower.
When it comes to Bitcoin followers, we can identify several natural categories:
Crypto assets (such as Ethereum)
Assets that obtain value from Bitcoin (such as miners, MicroStrategy)
Assets that indirectly profit from Bitcoin’s value growth (such as Coinbase)
By observing the trend similarity scores of these assets over a 1-year period, we can see some typical behavior patterns.Let’s look at a few examples:
This rule basically looks like this: over a long enough time frame (such as one year), the trend correlation between Bitcoin and all directly or indirectly related assets is very high.
In fact, the word “very high” is not accurate enough.I should say that these trends are very relevant.
Betting on any of these assets is basically equivalent to making a directional bet on Bitcoin.Yes, some of these assets will grow faster than others.But they all prosper or decline together.
The good news is that current conditions seem to favor the prosperity of these assets.
Four,Fluidity
A few months ago, we discussed that the financial situation in the United States is at a critical moment.
There are two possible scenarios:
If the inflation situation worsens, we will face the risk of “high interest rates last longer” and more rate hikes.Even if it is just this threat, it will lead to a tightening of the financial environment and a decrease in liquidity of financial assets.
If inflation improves, the Fed may start cutting interest rates.This would likely lead to a looser financial environment than it was at the time.Ultimately, the loose situation prevailed.This can be clearly seen from the trends in the national financial situation index.
Confronting liquidity is very dangerous.After the 2008 financial crisis, liquidity became the driving force behind everything.
Bitcoin (and its related assets) will see a good wind as the financial environment becomes loose due to expected rate cuts.
The only factor that could break this situation is the U.S. falls into a recession.Therefore, I pay close attention to the speed of change in the job market.
