Trading Concepts

Bitcoin Correlations

Knowledge and experience are key elements in successfully trading any financial market. Part of having a solid base of trading knowledge lies in knowing how markets generally relate with and react against each other. Intermarket analysis is the study of price correlations among different markets and how market prices may or may not be impacted as a result.

When trading Bitcoin, traders have discovered that its fundamental correlations with other global financial assets have tended to shift over time and are usually not nearly as robust as other, more established correlations.

For example, the strong inverse relationship between the US dollar and gold is both well-documented and reliable. The same generally cannot be said of the current correlation between Bitcoin and gold, or that of Bitcoin and any traditional currency like the US dollar, euro, or yen.

But perhaps it is precisely Bitcoin’s characteristic of low correlation with other markets that further boosts its appeal as a tradable asset. As most markets currently available for trading are correlated in some way or another with other markets, the emergence of a relatively uncorrelated asset like Bitcoin provides a potential opportunity to diversify trading and investment strategy.

Safe-Haven Potential

While the correlations between Bitcoin and other financial assets are generally neither substantial nor enduring, we believe there is a high potential for Bitcoin to serve at some point in the future as a major safe-haven asset like gold or the Japanese yen, but perhaps even more so.

Demand for safe havens generally rises sharply during times of market turmoil, macroeconomic concern, or geopolitical risk, as investors seek the perceived safety of these assets to hedge exposure to riskier assets like equities. As a decentralized cryptocurrency that is, by definition, entirely detached from any single central bank, economy, government, or political party, Bitcoin has a very real potential to serve as the quintessential safe-haven instrument.

In the meantime, Bitcoin presents many short-term and long-term directional trading opportunities based on its often-elevated volatility and consistently heightened trading interest from traders and investors across the globe.

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