Bitcoin Correlations Continue On-Again, Off-Again Relationship With Traditional Finance

• Bitcoin’s pricing relationship with other assets has been fluid
• Bitcoin has become less predictable but also less volatile in nature
• Onchain data doesn’t indicate that bitcoin holders are bearish at the moment

While bitcoin’s volatility has declined steadily since March, its relationship to traditional financial (TradFi) assets has been unpredictable. This unlikely pairing underscores the asset’s unique nature and a fundamental difference from more traditional assets.

Different narratives

Bitcoin has worn a number of narratives in recent years.

An initial “hedge against dollar inflation” narrative lead to “high beta tech stock” one, which now has morphed into bitcoin as an “uncorrelated financial asset.”

On a day where the Federal Open Market Committee (FOMC) left interest rates unchanged, both bitcoin and ether continued to decouple from traditional financial assets. BTC and ETH are down more than 4% and 7%, respectively month-to-date, while the S&P 500 and Nasdaq Composite Index have risen 4% and 5% over the identical time period.

The trend represents a change. In prior months, digital and traditional assets moved in near lockstep, with both taking similar cues from macroeconomic data.

Now, with two weeks remaining in June, bitcoin is closing in on posting a second consecutive losing month for 2023. while TradFi assets continue their ascent higher. (Ether has yet to post a losing month this year.)

The shifting correlations between bitcoin and traditional finance have occasionally been dramatic. The correlation coefficient between bitcoin and copper futures was 0.88 on May 27, but now sits at -0.74. Copper, often referred to as “Dr Copper” indicates economic health, given its wide range of uses across multiple sectors.

The correlation between BTC and the U.S. dollar index shifted from -0.80 to 0.63 over the identical time period.

The correlation coefficient typically ranges between 1.0 and -1.0 with the former indicating a direct pricing relationship and the latter indicating an inverse one.

Little change ahead of FOMC decision

A look at hourly correlations shows that little changed intraday ahead of the Federal Open Market Committee’s (FOMC) interest rate decision.

What likely stands out to traders and investors looking for alpha is the independent nature of bitcoin and its propensity to change stripes.

Its price action has been narrow over the most recent seven days, with its average true range (ATR) contracting by 14%. Bitcoin’s ATR year-to-date has fallen 41% since its year-to-date peak in March, as volatility has waned, despite recent increases in regulatory risk.

Few signs of increasing volatility ahead

A look onchain offers few signs that volatility will increase, as balances of bitcoin on centralized exchanges have declined. Analysts usually view declining coin balances on exchanges as a bullish signal, as they suggest investors are holding onto their assets. Increases often occur in preparation for asset sales.

An easy explanation for the decoupling between bitcoin and TradFi is the Securities and Exchange Commission’s (SEC) lawsuits last week against Binance and Coinbase – part of U.S. regulators’ growing regulatory scrutiny.

Still, the SEC’s actions are specific to the individual entities, not bitcoin itself (technically). Bitcoin’s correlation with Coinbase has fallen close to 50% since April.

Investors will need to monitor bitcoin’s relationship to everything, but anchor its relationship to nothing.