Crypto Markets Analysis: Bitcoin Correlations Show Dollar Still Rules (in the Inverse)

Over recent weeks we’ve made a point of highlighting bitcoin (BTC) and ether’s (ETH) correlations with different assets, and the extent to which they’ve sustained or changed over time.

That process, often referred to as intermarket analysis, aims to give insight into how one asset price might move, based on factors that impact another.

The measuring stick is the correlation coefficient, ranging from -1 to 1. A coefficient of 1 implies a direct pricing relationship, with a coefficient of -1 indicates a completely inverse relationship.

Bitcoin and ether, despite the differences in their blockchain consensus mechanisms, total supply and utility, have enjoyed a persistently strong pricing relationship, with a correlation coefficient above 0.9 for all of November and most of December. The coefficient now sits at 0.85, still extremely strong.

Other correlations we’ve been tracking include bitcoin’s relationships to equities, metals, energy and the U.S. Dollar Index (DXY):

What stands out besides BTC’s reliable correlation to ETH is the persistently inverse relationship to the DXY.

The 0.84 reading on Nov. 19 appears to be an outlier. BTC held an inverse pricing relationship with the DXY for the better part of 2022, turning positive between Nov. 9 and Nov. 27, but largely related to the FTX collapse.

For traders, the consistently positive relationship between BTC and ETH, and the equally consistent inverse relationship between BTC and DXY, presents an opportunity should those correlations stray from their norms.

While BTC appears poised to trade flat for the time being, a deviation in the relationship can be an opportunity – because correlations typically revert to their mean.

Bitcoin’s correlation with copper has been interesting to track, rising as high as 0.9 a week ago. Its decline to 0.41 since then raises questions of reliability.

Outside of a "black swan" event specific to a centralized crypto entity, BTC’s price remains largely tethered to the U.S. Federal Reserve’s monetary policy decisions.

Now that the Sam Bankman-Fried news is beginning to subside, Fed Chair Jerome Powell is reemerging as crypto’s primary antagonist, even if unintentionally so.

The takeaway is that crypto assets prices will largely be driven by inflation figures, the size of the Federal Reserve’s balance sheet and market interpretations of Fed officials’ statements.

For a newer asset class with the ability to function outside of traditional finance, old-school markets and economics continue to impact its progression.