Analysts and analysts will struggle to find an angle to explain the price movement during the day every time important financial data is released and this practice is common in the crypto sector.
Since the U.S. The Bureau of Labor Statistics announced a 7.5% increase in the consumer price index (CPI) on February 10, traders were quick to spot a link with price movements in cryptocurrency. However, historical correlation data suggest that investors should look more closely at whether there is a correlation at all between Bitcoin (BTC) and major economic indicators.
General investment advice suggests that traders ignore daily movements, especially when you consider that most assets are not traded within a 24-hour period.
More importantly, the volume of the bitcoin order book pales in comparison to gold futures, WTI and the S&P 500. Even when analyzing stablecoin trading, the average 7-day volume of bitcoin is $ 7 billion, while the top three funds traded on a stock exchange The S&P 500 has $ 54 billion in deals.
In short, a large inflow of orders from one person can easily distort the cryptocurrency market in the short term, but the impact on WTI oil, S&P 500 and gold is generally smaller.
Does the Bitcoin price predict inflation data?
Bitcoin fell to $ 43,200 after the 7.5% US CPI was released on February 10, prompting CNBC reporters to link the two events.
This statement correctly assessed market conditions at the time, but a longer time frame should be used when analyzing economic data. In addition, there is a possibility that bitcoin may not have a similar price correlation, a hypothesis that must also be tested.
A long-term comparison chart of the price of bitcoin and inflation in the United States creates a false impression of correlation and causation, especially when using logarithmic charts.
US CPI (orange, left) versus Bitcoin / US dollar (blue, right). Source: Trading View
Anyway, Bitcoin has been predicting economic data for about three months now. It peaked at $ 11,000 in September 2020 while inflation data remained below 1.5%, most recently in May 2021.
Then the price of bitcoin “cooled”, failed to break through the support of $ 60,000, and the sharp rise in the CPI stopped two months later in July at 5.4%.
For those who rely on mathematical formulas, the correlation coefficient between bitcoin price and US inflation has fluctuated between positive 0.95 and negative 0.94 in the last 12 months. Therefore, it is pointless to link one to the other from the point of view of a statistical approach.
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Do traditional markets show real correlation with bitcoin?
Another common mistake is to attribute the correlation of other assets to the performance of Bitcoin. Of course, there may be two months in a row with a correlation of 0.65 (positive or negative) throughout the year, but the data suggest otherwise.
Bitcoin, S & P500, WTI Oil and TIP ETF 30-day correlation chart. Source: Trading View
For example, between August and September 2021, the average correlation between the S&P 500 and BTC was 0.65. However, this is eclectic data because extended time frames do not reveal such evidence.
No price relationship has been found between Bitcoin and other major assets such as the price of WTI oil and the iShares TIPS Bond ETF, which tracks an index consisting of inflation-protected US government bonds.
Various data points suggest that investors should ignore intraday price actions after the release of financial data, because sometimes the data gives a false impression of correlation and causation.
While inflation or other data affects short-term prices, they do not necessarily affect the prevailing trend. The graph of correlation with traditional markets leaves no doubt that bitcoin is a category in itself.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trade involves risk. You need to do your research when making a decision.