Bitcoin has multiple long-term and short-term variables that affect its price, and many folks debate what its major correlations are, if any. It turns out, the same factors that affect bitcoins price real rates of inflation, monetary and fiscal policy and market exuberance also partially determine to which assets bitcoin is correlated.
Over the long run since its launch, increasing user adoption, ever-strengthening security and the widening network effect have propelled bitcoins market capitalization to greater and greater heights. Those are the long-term variables.
Lyn Alden is the founder of Lyn Alden Investment Strategy.
The halving periods tend to act as fundamental catalysts for the next bull market within this long-term trend, as new supply gets cut in half while incoming demand remains robust. As long as that demand indeed remains strong, upward pressure builds on its price, and then when it eventually breaks out, momentum traders hop on board with a new influx of demand and drive it up further.
All pre-programmed halving events occurred during periods where bitcoin had been off from its all-time highs for at least a year, and usually more than one year. On the other hand, the year after a halving has always been great for its price, without exception so far (albeit with a very small sample size), and has eventually led to the next blow-off top and a period of consolidation.
Visualizing post-halving market reactions.(Blockchain.com)
During those long consolidations, bitcoin becomes more correlated to short-term variables related to global liquidity and other risk assets. This becomes especially true as it reaches wider adoption and is invested in by the financial community. Basically, the ongoing debates about the degree to which bitcoin is correlated to other assets would do well to break bitcoins price behavior into two phases: bull runs and consolidation periods.
If we look at percent drawdowns in bitcoin compared to drawdowns in the S&P 500, for example, we can see a lot of correlation over the past two years in this consolidation phase, particularly when sharp drawdowns occur and investors broadly de-risk their holdings.
Percent drawdowns in bitcoin compared to drawdowns in the S&P 500 shows correlation.(YCharts)
More interestingly, during bitcoins consolidation period, it acts a lot like digital gold.
Gold investors have long since known that the single biggest variable for gold price movements has historically been real interest rates. Real interest rates measure the difference between a risk free yield, like the 10-year Treasury rate, and the prevailing inflation rate or expected forward inflation rate.
Whenever real rates go lower, especially if they turn negative, gold tends to spike in price. On the other hand, when real rates rise, gold usually suffers. The period from 1980-2000 was particularly bad for gold because real rates were strongly positive for the entire duration.
This relationship is due to the opportunity cost of holding gold. Gold is a scarce but yield-less asset and has fees for minting, verifying, purchasing, transportation and secure storage. When bank accounts and Treasury bonds pay a yield much higher than the prevailing inflation rate, your purchasing power can grow within the fiat system.
On the other hand, when bank accounts and Treasury bonds no longer keep up with inflation and are being debased with negative real yields, the opportunity cost for gold vanishes. Its inherently inflation-protected zero yield becomes a lot more attractive.
System-wide debt and wealth concentration, unfolding in the backdrop of civil unrest and slow growth will keep pressuring policymakers to stimulate.
Over the past two years, we can see that bitcoin behaved in a similar way during its consolidation phase. This chart shows the inflation-adjusted 10-year Treasury rate in blue on the left axis and the year-over-year percent change in the price of bitcoin in red on the right axis.
In this period, whenever real yields stalled or reversed upward bitcoins price usually would either stall or reverse downward.
Real Treasury yields peaked in late 2018 and have been on a multi-year downtrend into negative territory. Meanwhile, bitcoins price has been in a volatile rebound from the depths it experienced in late 2018 and early 2019.
In this period, whenever real yields stalled or reversed upward bitcoins price usually would either stall or reverse downward. The same phenomenon continued into the second half of 2019 and increased sharply in March 2020 during the deflationary shock. Most recently, it has occurred gradually since the beginning of September 2020.
There are multiple reasons that real yields can change direction and it particularly depends on what part of the yield curve we are looking at. Longer-term rates are mostly controlled by the market. For instance, inflation expectations were on the uptrend this year from their March lows due to stimulus, but stalled and rolled over at the beginning of September when second-round stimulus talks werent going well.
Due to where we are in the long-term debt cycle and current trends of currency debasement, most of the developed world (and particularly the U.S.) is likely to experience negative real yields for its bank savers and sovereign bondholders for quite some time. This wont be a linear process; there will likely be occasional political gridlocks on stimulus, deflationary shocks and other roadblocks, but the trend itself is almost inevitable. System-wide debt and wealth concentration, unfolding in the backdrop of civil unrest and slow growth will keep pressuring policymakers to stimulate.
Going forward, bitcoins price is likely to continue to be affected in the near-term by stimulus outcomes, and consequently shifts in inflation expectations and real yields. Thus, it could very well be correlated to some extent with other risk assets and inflation hedges, like stocks and precious metals.
Over the past month, fundamentals have served as a headwind for these various assets, including bitcoin, because weve been in one of these gridlock, counter-trend, no-stimulus, rising-real-yield periods.
However, when fundamentals turn back into a tailwind, likely due to another stimulus bill being passed and a renewed decline in real rates at some point, bitcoin likely has a lot more upside potential than similar asset classes. The network effect for the protocol remains very strong, and whenever it breaks out to new highs, momentum investors and institutional money have plenty of capacity to propel its market capitalization upwards.
See the original post here:
Lyn Alden: Bitcoin Correlations Depend on What Phase It Is In - CoinDesk - CoinDesk
- Monster-Sized Bitcoin Whale Transfers: Blockchain Parser Catches Significant Amounts of 'Cold BTC' Moved to Active Exchanges Featured Bitcoin News -... - December 3rd, 2021
- Bitcoin.com Unlocks Earn on Crypto Promoted Bitcoin News - Bitcoin News - December 3rd, 2021
- Bitcoin And Omicron: Is Another Black Swan Brewing? - NewsBTC - December 3rd, 2021
- True or false: 91% of surveys about Bitcoin and crypto are totally wrong - Cointelegraph - December 3rd, 2021
- This simple Bitcoin options strategy lets traders profit while also hedging their bets - Cointelegraph - December 3rd, 2021
- Can Bitcoin rally in December? | Tune in now to The Market Report w/ Gareth Soloway - Cointelegraph - December 3rd, 2021
- The Invisible Incentives Of Bitcoin - Bitcoin Magazine - December 3rd, 2021
- The future is Bitcoin according to South Park creators - Cointelegraph - November 25th, 2021
- Pokmon GO Creator's AR Platform Is Now Being Used To Hunt Bitcoin, Not Pocket Monsters - Nintendo Life - November 25th, 2021
- Stripe says it's open to accepting crypto for payments, three years after ending bitcoin support - CNBC - November 25th, 2021
- Bitcoin Thanksgiving Gift, Why BTC Heads For Fresh Rally - NewsBTC - November 25th, 2021
- JPMorgan Lists Ethereum As A Better Investment Than Bitcoin - NewsBTC - November 25th, 2021
- Buy the Dip: Bitcoin Whales Accumulated Over $2.36 Billion in $BTC After Price Drop - CryptoGlobe - November 25th, 2021
- How The Latest Macroeconomic News Is Impacting Bitcoin - Bitcoin Magazine - November 25th, 2021
- Macro Guru Raoul Pal Says Millennials Migrating to Bitcoin From Gold and Traditional Finance Heres Why - The Daily Hodl - November 25th, 2021
- NFL Star Wide Receiver Odell Beckham Jr. to Be Paid in Bitcoin This Season - Motley Fool - November 25th, 2021
- Hartford Police seized $20,000 from a Bitcoin ATM after it was linked to a fraud - WFSB - November 25th, 2021
- Transacting on Solana less energy-intensive than on Bitcoin, Ethereum, report reveals - AMBCrypto News - November 25th, 2021
- Why Bitcoin Is The Best Weapon Society Has Against Inflation And Wealth Inequality - Forbes - November 22nd, 2021
- Seeing red? FUD that! Here's what you should have bought instead of Bitcoin last week - Cointelegraph - November 22nd, 2021
- Bitcoin was looking good as an inflation hedge then it plunged nearly 20% - Markets Insider - November 22nd, 2021
- IRS Expects to Seize Billions of Dollars in Cryptocurrency Next Year More Than $3.5 Billion in Crypto Seized This Year Regulation Bitcoin News -... - November 22nd, 2021
- Bitcoin Helps Poverty Rather Than Hides It - Bitcoin Magazine - November 22nd, 2021
- 69-Year Old Israeli Lady Turned a $3K Bitcoin Investment to $320K: Now the Bank Refuses to Deposit - CryptoPotato - November 22nd, 2021
- Socialite and Model Alexis Ren Doesn't Trust the Dollar Economy, Says Crypto Is a Viable Alternative Featured Bitcoin News - Bitcoin News - November 22nd, 2021
- Strong Institutional Holders Moving Into Bitcoin, According to Cathie Wood of ARK Invest - The Daily Hodl - November 22nd, 2021
- Bitcoin, Ethereum and Four Altcoins Witnessing Mass Adoption As Crypto Market Targets $200,000,000,000,000 ... - The Daily Hodl - November 22nd, 2021
- Avalanche Value Surges Reaching an All-Time High, AVAX Joins the Top Ten Crypto Markets Markets and Prices Bitcoin News - Bitcoin News - November 22nd, 2021
- Quentin Tarantino Sued for an Upcoming Auction of Pulp Fiction NFTs Bitcoin News - Bitcoin News - November 22nd, 2021
- Karnataka home minister is a mad man: Congress state chief ... - November 20th, 2021
- Tesla And Elon Musk Devotee Cathie Wood Issued A Serious Bitcoin And Ethereum Fed WarningBut Held Her Huge $500,000 Price Prediction - Forbes - November 20th, 2021
- While Speculators Believe Bitcoin's Third-Largest Wallet Is a Mystery Whale, Onchain Data Suggests It's an Exchange Featured Bitcoin News - Bitcoin... - November 20th, 2021
- Bitcoin Price Falls Almost 20% Since Biggest Cryptocurrency's Historic Record - Bloomberg - November 20th, 2021
- If bitcoin is 'digital gold,' it should be taxed like gold | TheHill - The Hill - November 20th, 2021
- Bitcoin ETFs and Corporate Adoption Are 2 Key Crypto Catalysts to Watch - Motley Fool - November 20th, 2021
- Dont think anybody can say Bitcoin is a joke now: Morgan Housel - Economic Times - November 20th, 2021
- Does the Bitcoin, Ethereum, Solana, and Cardano Price Crash Signal Another Crypto Winter? - Motley Fool - November 20th, 2021
- Shakeout Or Top? Here's What Bitcoin SOPR Says About It - NewsBTC - November 20th, 2021
- Sports Illustrated Awards Sweepstakes Sponsored by FTX to Give Away 1 Bitcoin Bitcoin News - Bitcoin News - November 20th, 2021
- Aussie brothers hit Nasdaq with plan to turn Bitcoin green - The Sydney Morning Herald - November 20th, 2021
- Is Bitcoin Too Big to Fail? - Institutional Investor - November 6th, 2021
- Estimating This Cycle's Bitcoin Price Top - Bitcoin Magazine - November 6th, 2021
- Billionaire Tom Steyer: This type of bitcoin venture is a disaster for the environment - Yahoo Finance - November 6th, 2021
- Moving $25 Billion in BTC via Alternate Chains There's Now Over 400000 Tokenized Bitcoins in Existence - Bitcoin News - November 6th, 2021
- New York's Incoming Mayor Wants to Be Paid in Bitcoin (At Least Temporarily) - Gizmodo - November 6th, 2021
- Bitcoin price consolidation could be over, says trader as Ethereum, Polkadot hit all-time highs - Cointelegraph - November 6th, 2021
- Top 3 Price Prediction Bitcoin, Ethereum, Ripple: Cryptos stagnate but one readies to explode - FXStreet - November 6th, 2021
- Spending a String of 20000 BTC 2 Bitcoin Whale Transactions Move Over $1.2 Billion Bitcoin News - Bitcoin News - November 6th, 2021
- Square says bitcoin demand slowed in Q3 but picked back up in October; earnings weigh on stock - MarketWatch - November 6th, 2021
- Why The Navajo Are Mining Bitcoin - Bitcoin Magazine - November 6th, 2021
- Roughly One-Third of Bitcoin Is Controlled by a Small Cabal of Whales, According to New Study - Gizmodo - October 26th, 2021
- Heres the Line in the Sand for a Bitcoin Breakout, According to Veteran Crypto Trader Tone Vays - The Daily Hodl - October 26th, 2021
- As bitcoin soars in value again, here's what to think about before you buy - CNBC - October 26th, 2021
- Some Are Betting on State-of-the-Art Mining Machines as Bitcoin (BTC) Breaks New Price Ground - Yahoo Finance - October 26th, 2021
- Bitcoin is over $66,000. Here are 3 questions to ask yourself before you invest - CNBC - October 26th, 2021
- OLB Group Expands Bitcoin Mining Operation With 500 ASIC Miners, Expects $1M Monthly Revenue - Yahoo Finance - October 26th, 2021
- Swarm of Alternative Crypto Assets Outpace Bitcoin's Gains by Double Digits This Week Markets and Prices Bitcoin News - Bitcoin News - October 26th, 2021
- Elon Musk on his crypto portfolio: I only own bitcoin, ether and dogecoin - CNBC - October 26th, 2021
- Why is Illinois' largest electric utility mining Bitcoin near one of its coal-fired power plants? - Bloomington Pantagraph - October 26th, 2021
- US Government To Auction 4.94 Bitcoin Worth Over $300,000 - Bitcoin Magazine - October 26th, 2021
- Why Bitcoin Needs To Clear $64K For Hopes of a Fresh Rally - NewsBTC - October 26th, 2021
- Coinbase Follows Bitcoin Into Consolidation: Is The Stock Headed For $415? - Benzinga - Benzinga - October 26th, 2021
- Bitcoin rises to the highest since May, is now up 30% in October - CNBC - October 12th, 2021
- Bitcoin jumps to nearly 5-month high, topping $55,000 on Wednesday - CNBC - October 12th, 2021
- Bitcoin climbs back above $50,000 as it starts October on a tear - CNBC - October 12th, 2021
- What Caused Bitcoin Prices To Reach Their Highest Since May? - Forbes - October 12th, 2021
- Bitcoin Hits Five-Month High - TheStreet - October 12th, 2021
- Bitcoin is up 30% in Octoberand within striking range of its all-time high - Yahoo Finance - October 12th, 2021
- Swiss think tank initiates vote to add Bitcoin in federal constitution - Cointelegraph - October 12th, 2021
- Buying bitcoin or any other crypto is a huge leap of faith and you don't want to be the 'greater fool' - MarketWatch - October 12th, 2021
- BTC's Price Rise Gives 5-Year-Old Mining Rigs New Life Bitcoin Hashrate Jumps Close to 20% Since Last Week Mining Bitcoin News - Bitcoin News - October 12th, 2021
- Has Bitcoin Improved As A Flight To Safety Investment? - Benzinga - Benzinga - October 12th, 2021
- How Henry Ford Envisaged Bitcoin 100 Years Ago A Unique 'Energy Currency' That Could 'Stop Wars' Featured Bitcoin News - Bitcoin News - October 12th, 2021
- 3 warning signs suggest the Bitcoin price rally is overextended - Cointelegraph - October 12th, 2021
- BitMEX CEO Predicts Five Developing Countries Will Accept Bitcoin As Legal Tender Next Year Heres Why - The Daily Hodl - October 12th, 2021
- Bitcoin climbs to highest in nearly two weeks - Reuters - October 4th, 2021
- Cryptocurrency prices today: Bitcoin gains, ether, cardano slip. Latest rates here - Mint - October 4th, 2021
- Bitcoin and Ethereum Weekly Technical Analysis October 4th, 2021 - Yahoo Finance - October 4th, 2021
- Visa's New Payment System Will Accept Everything From Bitcoin to Dollars - The Motley Fool - October 4th, 2021
- New Rules Could Affect Robinhood and Bitcoin Traders. Here's What You Need to Know - The Motley Fool - October 4th, 2021