The correlation of bitcoin (BTC) and ether (ETH) to the U.S. Dollar Index (DXY) has once again turned negative. BTC’s correlation coefficient to the DXY has fallen to -0.36, after moving as high as 0.84 on Nov. 19.
Correlation coefficients measure the relationship between two assets, and range between 1 and -1. The former implies a direct pricing relationship between the assets, while the latter indicates an inverse relationship.
BTC had held a persistently inverse relationship to the DXY since July, before crossing into positive territory on Nov 9. In August, the correlation between the two assets fell to -0.94.
The timing of the reversal coincides with FTX-related market turmoil because the shift in pricing relationship occurred on the same day that Binance and FTX’s tentative deal fell through. The return to negative correlations signals that:
- Markets have likely reset and found a new level of comfort specific to prices
- Macro narratives will start to take hold again, as what impacts the dollar will likely be seen in crypto prices
On the first point, bitcoin has resumed its bout of range-bound trading, albeit near $16,500 as opposed to $19,500. The 15% haircut represents the discount applied to asset prices following questions about FTX and related contagion. Volatility, as measured by the Average True Range (ATR), has declined 40% over the most recent two weeks, as markets have begun to calm.
ETH’s correlation to the DXY has also returned to negative, while its volatility has declined 35%. BTC and ETH remain highly correlated, with a coefficient of 0.90.
On the second point, a steadying of BTC's price and return to inverse correlations means that issues pertinent to U.S. dollar movement will have significance for BTC as well. Investors should weigh Federal Reserve Chair Jerome Powell’s comments Wednesday and the central bank’s next meeting on Dec. 14 when it decides on the fed funds rate.
Asset managers continue to reduce exposure
Amid the lack of price volatility, institutional-sized asset managers have continued to reduce their long exposure to BTC. According to the most recent Commitment of Traders (COT) report, asset managers trimmed their long exposure by 247 contracts, the third time this has occurred in as many weeks.
On Nov. 8, asset managers comprised 43.4% of long open interest on the Chicago Mercantile Exchange. As of the most recent release, that number has declined to 29.7%. Leveraged funds now make up the largest percentage of open interest at 31.3% long, while comprising 47.2% of short open interest.
The 378 contract increase in long positions is down from the 1,367-contract increase in the prior report. The shift could be related to the February contract for BTC now moving into contango as opposed to backwardation. Contango occurs when futures prices for later months exceed those of nearer months. This condition is often bullish for spot prices, and prices tend to move toward the higher futures contract prices as expiration approaches.
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