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Crypto Markets Analysis: Bitcoin’s Improving Health May Be Thanks to 'Dr. Copper'
Correlations between bitcoin and rising copper prices reached seven-month highs.
Updated Jan 18, 2023, 8:56 p.m. Published Jan 18, 2023, 8:46 p.m.
Bitcoin’s correlation to copper has reached highs last seen in June.
The increased correlation implies that bitcoin (and ether as well) are aligning with rosier expectations for the U.S. economy, and that the current price surge may continue.
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Copper is a widely watched measure of economic health because of its wide range of uses across numerous economic sectors. It is often called "Dr. Copper" for its professorial ability to forecast trends
The on-again, off-again relationship over the most recent 12 months pivoted on Jan. 6 from a correlation coefficient of 0.09 to its current coefficient of 0.90. Correlation coefficients range from -1 to 1, with the former implying an inverse price relationship and the latter implying the opposite.
Both assets traded higher at different points Wednesday, following better-than-expected economic data.
The producer price index (PPI) for December fell 0.5% versus expectations for a 0.1% decrease. The decline was the largest monthly drop since April 2020 and highlights a gradual slowing of inflationary pressures. Food prices declined 1.2%, the largest monthly decline in over a year.
Also of note is BTC’s 0.91 correlation to gold and its -0.83 correlation to the U.S. Dollar Index (DXY). The confluence of all three implies that markets are anticipating a slowing of monetary tightening and that economic expansion will bring BTC along for the ride.
Bitcoin and copper are both displaying increased momentum technically. The Relative Strength Index (RSI) for each are 75 and 77, respectively. Cautious technical traders will likely note that RSI readings above 70 can indicate that an asset is overpriced, and poised for a potential decline in prices.
Current readings on the Commitment of Traders (COT) report, however, offer one disconnect. The weekly COT report, showing the holdings of participants within futures markets, can provide clues about investor sentiment.
The most recent COT report shows commercial copper users are net short the asset, reflecting concerns about price declines ahead. By contrast, institutional BTC holders are net long the asset, per the most recent report.
If the correlations hold, a downturn in copper prices could be accompanied by a pause in BTC’s recent move higher.
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Japan’s Higher Rates Puts Bitcoin in the Crosshairs of a Yen Carry Unwind
A stronger yen typically coincides with de-risking across macro portfolios, and that dynamic could tighten liquidity conditions that recently helped bitcoin rebound from November’s lows.
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