Bitcoin Price Correlated With Financial Markets – Bitcoin Magazine
This is an opinion piece by Mike Ermolaev, head of PR and content at Kikimora Labs.
Setting The Context: Global Economy Fundamentals
The economy is still recovering from the COVID-19 outbreak as new problems emerge. We are now in a time of rampant inflation with central banks trying to remedy it by raising interest rates.
The US CPI (Consumer Price Index) data, released on October 13, came in higher than expected (8.2% year-over-year), negatively impacting the bitcoin price. But inflation is not the only problem, the global economy is also struggling with the energy crisis, which affects Europe more than the US, due to its heavy dependence on Russian natural gas and raw materials.
On the eastern side, the war in Ukraine with subsequent sanctions against Russia adds further geopolitical instability and economic uncertainty. China’s zero-COVID policy is also disrupting supply chains around the world, and the Evergrande default is undermining one of the world’s largest economies.
Looking at the major currencies, the dollar index looks strong compared to others. The Federal Reserve raised interest rates by 75 basis points in November, and the Bank of England raised interest rates by the same amount. This policy of quantitative tightening aims to reduce the money supply and dampen price pressure. That will likely continue into next year and beyond. However, a global recession and the risk of stagflation are still very strong, so no country can feel safe from central bank monetary policy.
Bitcoin correlation with the economy
Bitcoin has proven not to be immune to this global turmoil. Although in the early stage the price was independent of traditional finance, the correlation started to show in 2016.
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The idea of bitcoin as a “digital gold” became popular because it both shared the scarcity and difficulty of extraction (mining), as well as fulfilling the role of a store of value. Since many see bitcoin as a risk asset, the correlation with the S&P 500 and Nasdaq-100 became visible – no different than traditional stocks.
At the time of writing, bitcoin’s 40-day price correlation with gold reached 0.50 (after being around zero in August). According to Bank of America strategists Alkesh Shah and Andrew Moss:
“A declining positive correlation with SPX/QQQ and a rapidly rising correlation with XAU indicates that investors may view bitcoin as a relative safe haven as macro uncertainty continues and a market bottom remains to be seen.”
Negative events
There are some macroeconomic factors in the larger cryptocurrency ecosystem that contributed to a bearish market: the Terra/LUNA collapse, the forced liquidation of Three Arrows Capital, and the bankruptcy of Celsius being the most important.
The incoming bitcoin mining regulations from the EU and the current bitcoin mining profitability crisis must also be taken into account.
Bitcoin: Present and Future
Despite all the above adverse events, bitcoin somehow managed to keep its price in the $19,000-$20,000 range, with record low volatility. At the moment we are observing unusual stability in the bitcoin price, recently even matching the volatility of the British pound.
On the contrary, stocks have experienced high volatility and price movement, also following speculation about the Fed’s future decisions. In accordance Bloomberg’s Chief Commodity Strategist Mike McGlonethat’s why bitcoin could rise after a steep discount and eventually beat the S&P 500. He believes bitcoin’s limited supply and deflationary approach could help it recover to its previous price levels.
Since the last flash crash in mid-June, the price has been fairly stable, but we know that it rarely sits still for too long. This means that the probability of a sudden (bullish or bearish) breakout increases over time. The longer the price remains inactive, the stronger the breakout will be.
Bitcoin price consolidation
Additionally, BTC futures open interest is higher than ever, with liquidations hitting an all-time low. A lot of liquidity accumulates here, which means that there will be an even stronger impulse when the rate starts to move again.
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According to strategist Benjamin Cowen, bitcoin is expected to rise to “real value”, after falling another 15%. “Right now, the data suggests we’re about 50% undervalued compared to where fair value is.” Cowen believes we will have to wait until early 2024 to see this increase happen.
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Goldman Sachs strategist Kamakshya Trivedi takes a different view, arguing that the US dollar index, which has been hitting record highs since 2002, could be bad news for the current bearish bitcoin.
A bearish scenario: Could the 2018 drop happen again?
Some analysts have wondered if the 2018 scenario (low volatility, then big price drop) could happen again today because market conditions look pretty similar. We have the same 10% trading range and we know something is going to happen soon.
Comparison of 2022 BTC price (top) vs. 2018 (bottom) using eight-hour candles. (Source)
A notable difference between the two cycles is that in 2018 there was an increase in addresses sent to spot exchanges, whereas in our current cycle we see liquidity moving away from exchanges and not many new addresses being created. According to a CryptoQuant analyst, this should mean that we will not witness a similar scenario as in 2018.
A 2018/2022 comparison of spot exchange deposit addresses. (Source)
What about Uptober and Moonvember?
Historically, Q4 is a great time for bitcoin, with bullish trends starting in October and increasing in November. So the months of October and November were colloquially renamed “Uptober” and “Moonvember” – at least this is what happened back in 2021.
Can we still expect such a bullish Q4 in 2022? It is difficult to say, but the unfavorable macroeconomic situation and the geopolitical problems make it more difficult to imagine the same recovery we saw last year. After all, the bitcoin market has been down for 10 months in a row and we don’t see any particular signs of recovery at the moment.
We must also keep in mind that, despite the negative global scenario, bitcoin’s “safe haven” role can help give the price some extra strength, especially in these troubled times.
Exchange data analysis
Liquidation data on the Bitfinex exchange was analyzed by filbfilb. He concluded that an upward breakout would have less momentum than a downward breakout. In fact, liquidity above $20,500 is mostly 10x, while liquidity below $18,000 is mainly 10x, 5x and 3x, meaning that a bullish breakout would be “less brutal” than a bearish one.
Bitfinex Liquidation Chart. (Source)
Conclusions
We are currently witnessing a period of stasis in the bitcoin market. Bitcoin price needs to start moving again after two months of consolidation. The overall economic scenario does not look bright at all, and bitcoin is correlated to real-world events, but investors can still recognize digital gold’s role as the most popular cryptocurrency. A strong bitcoin price breakout is expected, with new volatility on the way.
The possible scenarios could be: a quick dump and then a bullish recovery (V-shaped bounce) or a longer and deeper price collapse, after breaking the $19,000 resistance level.
Whatever happens, bitcoin will continue to be the most innovative technology of the past decade, allowing financial freedom and direct control over one’s wealth. Bitcoin has historically witnessed many strong bearish times and has always recovered from them.
This is a guest post by Mike Ermolaev. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc. or Bitcoin Magazine.
