Want To Know Where BTC Prices Are Going? Watch USD

As the bitcoin market continues to mature, with more players entering and liquidity growing to support broader uses, the world’s favorite cryptocurrency is beginning to reflect movements of the USD with an astoundingly high correlation.

Bitcoin, a new entrant to the forex world, is just beginning to find its place among the world of alternative assets. Many assume that bitcoin, as a decentralized, non-state issued currency, would gain value as inflationary pressures on traditional currencies increase. If that were the case, it would more closely follow existing inflation hedges, most notably gold, but that has not been the case. As shown in the chart below, BTC’s correlation with gold is not only relatively insignificant, it’s actually been -0.4 since the market settled following the mid-April crash.

BTC vs Gold

Bitcoin is known for being a volatile asset, with prices as low as $13 and as high as $260 in 2013 alone, which has led many to declare it unpredictable. As it turns out, not only have bitcoin exchange rates been predictable over the past two months, they actually follow the currency for which bitcoin has the highest propensity to disrupt.

Looking at data over the same time period, since May 1 of this year, daily bitcoin price movement has had a 0.76 correlation with USD. The correlation actually increases to 0.89 when shifting USD three days forward. Said otherwise, since May 1, BTC prices have had a 0.89 correlation with three-day-old USD index levels.

BTC vs USD

The predictive nature of USD for bitcoin may surprise some, but the underlying fundamentals of their high correlation may make sense, at least for the time being. Historically, the US dollar has served as a risk-averse asset, gaining value as traders pull out of other financial products during periods of uncertainty and doubt. Bitcoin seems to be following the same path, serving as an alternative asset for those averse to the USD’s susceptibility to inflationary central policy.

One important implication of this correlation is that it means bitcoin is effectively even more volatile than people would assume. USD is by far the largest exchange market for BTC with approximately 75% of total volume. If the two assets are correlated, it means that when BTC rises, it increases not only by the value compared to USD, but also by the gains USD made relative to other currencies.

Bitcoin has a long road ahead as increasingly sophisticated players enter the market. It’s role as an alternative asset will continue to be refined in the years to come, but the way it’s been used recently is quite clear.

 

About the author  ⁄ Jonathan Stacke

10 Comments

  • Reply
    Raylan
    June 21, 2013

    This is cool. How do you figure this stuff out and why bother telling people instead of just trading on it personally?

    • Reply
      Jonathan Stacke Author
      June 21, 2013

      Thank you. We built some great internal tools that help with these types of analysis. We do trade BTC, but we’re far more interested in seeing the market mature – our hope is that building thoughtful discussion will expedite that process.

  • Reply
    LDG
    June 21, 2013

    I guess bitcoiners aren’t the brilliant forward thinking traders they think they are.

    • Reply
      Rassah
      June 21, 2013

      I think as long as they think that bitcoin will be up long-term, they’ll be fine.

  • Reply
    John
    June 21, 2013

    You can do a chart overlay of bitcoin with the DXY (USD Index) on Tradingview.

  • Reply
    Reinout
    June 21, 2013

    I don’t get it:
    if the price of bitcoin in USD follows the USD index doesn’t that mean that the market value of bitcoin (its index) is dead stable and apparently decoupled from the USD price?
    The three day shift then could be an indication of the time it takes to move dollars to bitcoin sellers.

    • Reply
      Eduardo
      June 21, 2013

      Nope. One is an index, one is price. Notice the scale on the index and the scale on BTC price. They aren’t the same unit of measure. The point is that they move directionally the same way.

  • Reply
    Statistician
    June 21, 2013

    Interesting topic but unfortunately the statistical analysis analysis is technically flawed.

    1. Since BTC/USD has USD in the denominator it follows by definition that Corr(BTC/USD, Lag(USD)) is high.

    2. Instead of looking at absolute values you should look at first differences of the variables. Looking at absolute values will give you spurious results like the ones presented in this article.

    The topic of predictability in Bitcoin value is really interesting so please follow up with proper statistical analysis. Thanks!

  • Reply
    Leo
    June 22, 2013

    Interesting stuff. So is this expected to continue? Seems weird that bitcoin would follow USD. Maybe it decreases as USD becomes a smaller portoin of total bitcoin trading?

  • Reply
    pietrod21
    June 22, 2013

    now that the usd index go hight
    http://www.bloomberg.com/quote/DXY:CUR
    we can soon prove if this correlation work.
    buy anyway this is very very interesting (and strange)!

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