Last month we noted the surprising correlation between USD and BTC. From May 1 through June 20, the two currencies shared a 0.76 correlation, which actually increased to 0.89 when comparing bitcoin with three-day-old USD levels. Since then, markets have reacted to a series of macroeconomic events that not only broke that correlation, but actually reversed it, such that BTC has been inversely tracing USD with remarkable accuracy ever since.
Fed Influence May Be Inescapable, Even For Bitcoin
In a press conference on June 19, Ben Bernanke said the Fed may begin tapering its asset purchases as early as later this year and that the program may end altogether in mid-2014, potentially marking the beginning of the end of the multi-year balance sheet expansion of the central bank. Following the press conference, US markets suffered their worst four-day losses in 2013. The S&P fell 6.2% and treasury yields rose more than 40%, while the USD rose steadily over the next three weeks, gaining more than 4%.
This news and the associated drastic market movements broke the strong correlation mentioned above, as an important driver of inflation concerns around USD showed signs of coming to an end. Bitcoin, seen by many as an alternative to the regularly-debased fiat currencies issued by governments, would theoretically see lower demand in a world where the Fed is no longer monetizing $85 billion of debt per month. This may explain the remarkable -0.88 BTC / USD correlation that began at the same time.
Reinforcing this potential causation behind the correlation is the dramatic uptick in BTC starting on July 10 when Bernanke stated that “highly accommodative monetary policy for the foreseeable future is what’s needed” – the same day USD began heavily paring gains made after his comments on June 19. Similarly, BTC began more closely tracking gold over the period, though this is to be expected, given the historically inverse correlation gold has with USD.
Still Early To Draw Conclusions
Not to be overlooked is the news on June 20 that Mt. Gox, the largest bitcoin exchange by volume, was suspending USD withdrawals. Coinciding closely with Bernanke’s initial taper messaging, this may also have had a profound effect on market confidence, driving BTC rates down. That said, smart traders with capital stuck on Gox would have actually been buying BTC to avoid the fiat withdrawal restrictions, and there is little justification around the Gox situation that would drive the more recent sudden uptick in BTC.
Bernanke gives his semi-annual testimony on US economic and monetary policy today. Whatever effect his testimony has, we’ll be watching to see if the strong correlations that have been building hold over the coming weeks, as it may be the beginning of a trend towards bitcoin finding its place as an alternative asset in the global economy.
For further discussion on our bitcoin trading outlook, see the Trading Update section of our Mid-Year Outlook.
You can find the latest news and bitcoin market prices on our Market Dashboard.
Plain coincidence. Proof me wrong with some kind of statistical valid approach. The above is as good as astrology: school kid mathematics applied and deductions that are pleasing the author.
wow dude have you never read a financial outlook before? any asset will have correlations to others in the market and should react to headlines. bitcoin is young so people are still trying to figure it out. the dollar – bitcoin relationship may break but its perfectly reasonable to investigate
I seldom read “financial outlooks”. They tend to be wrong 50% of the time. BTW: Not that it matters, but before you continue bashing me as an idiot. I have a degree in mathematics and had some lecture classes in what you would call advanced economics.
Makes a lot of sense that bitcoin would act as an inflation hedge. The way it switches is odd. There’s probably a lot of bitcoin specific news that will have a greater impact than inflation concerns.