Bitcoin and Its Correlation to Other Assets and Markets Revealed

  • Darryn Pollock
    ⭐ Features

    Bitcoin has mostly been a rogue market, however, more and more correlations are being drawn; but what does this mean?

Bitcoin and Its Correlation to Other Assets and Markets Revealed
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In the realm of stocks and asset markets, there is a lot of looking into graphs to find patterns, as well as correlations. However, with the emergence of the Bitcoin market, it has been quite hard to peg it down into any sort of box.

The volatile cryptocurrency, as well as its other even more volatile cousins, have mostly matched to the beat of their own drum; yet, there have been times when correlations have been drawn to try and effect predictions and assumptions.

One of the biggest correlations that has been attempted to be forged is between the Bitcoin market and the stock market. Back when Bitcoin was more wild and volatile, and the stock market was matching it, there was a case for it. However, the real correlation was much more tied to the VIX index.

Now, there is a growing belief that a more stable Bitcoin price could be closely correlated to the stock market — but this may well spell disaster for an asset that has made such a name for itself as a rogue.

Still, the arguments abound that there is even a correlation with the equities market, as well as with emerging markets.

A more volatile VIX

The VIX Index is the Volatility Index and is a popular measure of the stock market’s expectation of volatility. It is colloquially referred to as the “fear index” or the “fear gauge.” The VIX was an important metric back in February this year as it spiked to big highs.

In February, the US stocks experienced their worst week in two years seeing the Dow plunges 1,000 points. This, of course, sent the VIX spiking as the fear of crashes and other negatives peaked.

At the same time, Bitcoin’s price was falling, but the reason was not much correlated to the reasons for the stock market dropping. Rather, there was an inverse correlation between VIX and Bitcoin. So, it is between the VIX and Bitcoin, not the Stock Market itself, where the correlation seems to exist.

Fundstrat’s Tom Lee said at the time that the initial relationship between the Stock Graphs and the Bitcoin price had only a limited correlation.

“[Bitcoin’s chart] could easily look like a chart that looks like the S&P, because both had a parabolic move and then subsequently gave back some of these gains,” Lee told CNBC’s Trading Nation.

He added that the “the connection between the two is really, really limited.”

A new era of correlation

However, Bitcoin’s markets have been performing slightly differently to the way they were back in February, and as such, their own volatility has reached new lows. To this end, there have been some similarities between the stock market and Bitcoin, prompting some new questions of correlation.

In its in-depth analysis, BitBull Capital CEO Joe DiPasquale states that timing is the key factor. Stocks and cryptocurrencies, he concludes, can only move in tandem in the short term. So, looking long-term, from 2015, there has been no correlation, and thus traditional and digital markets are not related in the long term.

But looking ahead, this may be the beginning of a long-term correlation, especially considering the drive to entice more institutionalized investors into the Bitcoin market. This may indicate a maturing market, but it could also take away a key facet of the cryptocurrency space — its volatility and potential to skyrocket — which brought investors to it in the first place.

Commodities and equities

There is also some evidence of a correlation to commodities and equities that are raised by Clem Chambers, CEO of private investors website

“Bitcoin is not meant to be an asset that is correlated to things like commodities and equities,” he explains. “However, it is — and if you are a chart-watcher you have likely seen Bitcoin move in line with other markets. The clearest example of this has been shown in big Bitcoin moves when certain countries’ markets open. South Korea was a strong example, and London often moves Bitcoin at open.”

“Another example has been when equity indexes move and ten minutes or so later or roughly the time it takes for the Blockchain to do its thing, the price of Bitcoin sets off in a new direction.”

Chambers make a good broad statement, although Bitcoin is relatively rouge, it is still something that is linked to ‘fiat’ and is a conduit for hedging and arbitrage where lots of potentially easy money is to be had.

So, while people discuss and debate the correlation properties of Bitcoin and try and utilize that information to their advantage, it cannot be said one way or another if there is a strong or direct correlation to other markets — but there certainly is a case for it.

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Question of the Day: Can Stablecoins Accelerate Cryptocurrency Adoption?

  • Yuri Molchan
    ⭐ Features

    Stablecoins show hardly any volatility compared to Bitcoin and altcoins, many are hoping that they will be able to bridge new crypto economy and regular fiat money

Question of the Day: Can Stablecoins Accelerate Cryptocurrency Adoption?
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Bitcoin, the father cryptocurrency, emerged in hope that it will remove all intermediaries in electronic commerce that cut off their share of payments. BTC was perceived as a P2P way to replace fiat cash in an electronic format, which would enable one party to pay another without any financial institution or payment platform which would demand its share of a transaction as a reward for its services.

What is wrong with Bitcoin

For quite a while Bitcoin was performing the way the crypto community expected. But the situation changed later – BTC rate became weaker, thus bringing down its financial and economic reliability, when it gets to be used as a regular means of payment.

You cannot have a currency that would cost like a British castle today, a gram of gold – tomorrow and a pack of French fries the day after.

At that point practical fintech minds came up with an idea of creating something which would become a breakthrough in the universe of crypto – a so-called stablecoin.

Will stablecoins solve the volatility problem?

Technically, stablecoins are protected from the volatility roller-coaster that Bitcoin and other cryptos love to ride. They are programmed to keep their prices stable and investors now are largely attracted to this new type of digital assets.

Stablecoin does not show any volatility in its monetary value, since it has a fixed connection to an asset it is pegged to. The major goal of using stablecoins is taking the best from decentralized crypto coins and combining it with a constant value. Thanks to it, stablecoins can be used as a reliable means of trade.

Asset-pegged stablecoins

Asset-backed ones get their value from an asset as can be understood from the name. An asset provides the necessary value to a coin, as well as the necessary legitimacy.

A great example of an asset-pegged stablecoin is Tether (USDT). In spite of a series of scandals at the end of last year, it remains the most popular stablecoin in the crypto market.

Recently, it has partnered with the Tron Foundation to launch a Tron-based stablecoin.

Other examples are TrueUSD (TUSD), USD Coin (USDC), the Gemini Dollar (GUSD), and the Paxos Standard (PAX). They are all pegged to the USD.

Crypto-backed stablecoins

Some digital coins work in a similar way to fiat-backed ones, however, they are pegged to collateral crypto. That means that crypto assets that ensure the value of such stablecoins are stored in a wallet similar to escrow.

A good example of a crypto-pegged token is Maker, which is ranked 16 on CMC.

Algorithmic stablecoins

Even though, stablecoin can be interesting at first thought but the way they are built goes against the principle of decentralization that crypto coins have as a foundation. Thus, many crypto fans and evangelists are positive that stablecoins must be linked towards not a centralized asset but a computer algorithm which takes value from a balance between supply and demand.

Basis is now considered the most promising algorithmic stablecoin of all.

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Can stablecoin ensure smooth future for the crypto industry?

The primary goal of all crypto assets was and remains to come up with virtual asset that would be liquid enough and not vulnerable to market volatility. From this point of view, stablecoins are a dream of all crypto fans and evangelists of a decentralized economy.

Apart from the potential to conduct crypto transactions smoothly, experts believe it can bridge the two worlds – fiat and crypto, bringing them a mutually beneficial coexistence. However, that may take time.

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