This article does not contain any investment advice or recommendations. Every movement of investment and negotiation involves risks, you should conduct your own research by making a decision.
Looking at the Bitcoin chart, and the stock market chart, including the Dow Jones and the S & P 500, you may have noticed an interesting similarity. The stock market quickly reached new heights, with Donald Trump himself tweeting how he had risen 20% since his election. Shortly before these heights, Bitcoin had also reached its record of $ 20,000 on December 17th.
The two markets then began to dive, first, Bitcoin, whose price dropped gradually up to $ 6,000 before hitting a floor. The stock market fell much faster, but the model looked remarkably similar, with them finding a floor last Monday. The Dow Jones Industrial Average experienced its biggest drop in history on a Monday, and the S & P 500 has had its worst day since 2011. Questions then began to emerge, which was the first time the day was out. whether there is a correlation between very different assets. And can we predict future movements?
What happened to the Stock?
To determine if there is a correlation, one must examine the reasons why the stock market is down and investors are apparently selling. John F. Wasik, Behavioral Finance The Forbes columnist lists some reasons why the actions crashed. He believes the general stock market was overvalued, and uses a gauge from Robert Shiller, a Yale economics professor, to gauge that. He adds that volatility has returned, looking towards the VIX index, and this is important in the search for Bitcoin correlation.
In addition, interest rates are rising and it is believed that inflation could come back. What happens next? According to Jacob Kirkegaard, a researcher at the Peterson Institute for International Economics, computers (which perform 90% of stock market trading) are doing their turn, calculating that even higher inflation is inevitable.
And why? Bitcoin made a plunge
These explanations of why the stock market has collapsed are very different from the reasons why it was assumed that Bitcoin dropped by nearly 70%. The problem for Bitcoin, following an expected correction when it reached $ 20,000, was that there was a flood of damaging media reports, some unfounded and just incorrect.
The confusion of any possible ban in South Korea's damage before finally being cleaned up by the South Korean government. Then, China announced that it would put one more nail in the coffin of Bitcoin in the country by placing a firewall to restrict foreigners' access to trade. There was even news out of India that was blatantly misinterpreted, also concerning a potential ban, which saw Bitcoin plummet
Of these external events, there was no discernable relationship why the Bitcoin market and the stock market fell. at the same time. But looking deeper in terms of correlation graphs, you can see some sort of link.
Z-scores and Fear Gauge
A data domain that seems to show some kind of correlation is in a matrix of z-scores and p-scores. These correlation graphs are pretty confusing, but the point is that if two assets share a z-score that is negative or positive, there is a direct or inverse relationship.
In the graph below, the numbers are called z-scores. They represent the direction and strength of the relationship between the two sets of data. A higher absolute z-score means greater correlation, whereas a lower absolute z-score means less correlation.
<img alt=" Cryptocurrency Correlation Matrix "src =" http://cointelegraph.com/storage/uploads/view/6f564364fee131f475f41e416a721c8d.png "title =" Cryptocurrency Correlation Matrix "/ >
At a glance this correlation graph can show that the relationship between Bitcoin and S & P 500 is at a weak positive relationship, but the correlation between VIX and Bitcoin -0, 31 in fact a moderate negative relationship.
The VIX is a This graph indicates that there is an inverse correlation between VIX and Bitcoin, which has been demonstrated in an article on the CBOE website. VIX and Bitcoin overlap between VIX and Bitcoin, not the stock market itself, where correlation seems to exist, but again over the last three years, VIX Index has outperformed Bitcoin in terms of volatility and volatility. of volatility 2015-2016 the correlation was almost inexistent aunt, it's 2017 that fits the model.
Fundstrat Tom Lee shared his agreement with this sentiment on CNBC stating that the initial relationship between stock charts and the Bitcoin price had only a limited correlation "19459018] could easily look like a map that looks like the S & P, because both had a parabolic motion and then gave back some of those gains, "Lee told CNBC's" Trading Nation "
But it is there that the relationship can stagnate. Lee added that "the link between the two is really, really limited." He went on to say that the correlation, if any, was perhaps due to a more cavalier approach on the part of investors who also bought cryptocurrencies.
"In the last 12 months we not only had a strong cryptocurrency recovery, I would not be surprised if investors who saw risky assets outperform all over the world were also buying cryptocurrency. "
Datatrek added to Lee's sentiment on this" crossover "of investors. They stated:
"Since investors only have one brain to deal with the risk, they will make similar decisions regarding cryptocurrencies and stocks when they do not. they will see price volatility in these. "
Christopher Harvey, head of equity strategy at Wells Fargo, thinks that there may be a stronger correlation than was said previously, but he, like the analysts Lee and Datatrek, establishes a connection between these relationships more to the feeling than empirical evidence. "Monday [February 5] what we have seen is that all risk products are selling," Harvey said Wednesday on CNBC's "Fast Money". According to him, a blow to the market can make investors panic and start selling Bitcoin: "That sometimes adds oil to the fire."
Again, it is this idea that Bitcoin has crossed a threshold. Morgan Stanley analysts also said that traditional investors may be shifting risk from the relatively stable market share. stock markets in Bitcoin, and vice versa, showing again this crossover that could slightly amalgamate the markets.
Marcus Poh, trainee in negotiation at Octagon Strategy, also thinks that the two markets are starting to mix up a little as he says:
"As far as indirectly, I would say that the BTC is considered a hedge against currencies, similar to that of gold., recognition and acceptance of the BTC become much larger, there is a chance that it is in a similar position to that of gold and the stock market. "
Fear breeds fear
For now the idea of correlation between the Bitcoin and traditional values market is limited to the "fear index" because of the buzz of cryptocurrency in 2017 and the bullish recovery of investors.They can not really be plotted on a chart against each other. others, and often deviated at key moments. Last August, the global economy was hard hit by rising tensions between the United States and North Korea, but the Bitcoin market remained unperturbed.
But what could be concluded? across the markets is that investor sentiment can carry forward from stock market to Bitcoin market. Due to a wave of traditional adoption that saw Bitcoin accepted as an investable asset, there is the beginning of a crossover.
Thus, when fear and risk go public for reasons given by John Wasik, the VIX also begins to increase. It has been shown that there is an inverse correlation between this and the Bitcoin price that can be seen on a overlapping graph. None of these relationships or correlations, though tenuous as they are, can really help predict markets, they can only prove that the fear of investing is not just isolated from the stock. But for the moment, Tom Lee sums it up in a bold, non-absurd way:
"Cryptocurrencies have their own economy based on the activity of this Blockchain: Equities have their own economy based on earnings per share Institutional overlap is essentially nil. "