Over the past seven years we’ve seen the meteoric rise of Bitcoin (BTC). Certainly BTC has some maturing yet to do, if it’s to compete head to head with established markets such the Nasdaq. But are the major trends in other markets correlated at all with those of Bitcoin?
Tl;dr — No. And it’s a good thing!
By simply eyeballing historic trading trends of Bitcoin overlain with those from the Nasdaq (Fig. 1), it may be tempting to see a number of similarities between the two. For example, in early 2018 there appear to be a number of correlated rises and falls in both markets directly following the most dramatic decline in the BTC price, from it’s latest all time high (ATH). However, keep in mind that in Figure 1 BTC is plotted on a logarithmic scale, while Nasdaq is linear.
Eyeballs can be deceiving. In order to determine if there is any real correlation between the markets, we will need a more robust mathematical comparison.
The following plots (Fig. 2, 3) of market movements are derived by subtracting the previous day’s valuation from each days valuation for both markets, i.e. i(n)-i(n-1). The calculation is very simple: just take each day’s valuation and subtract that of the previous day’s to get the resulting ‘market movement.’ Note: BTC valuations are daily averaged exchange prices, while Nasdaq valuations are daily closing prices.
You can view the exact details of the python scraping/compiling and Matlab calculation/formatting used to create all figures at my Bitcoin analysis repository.
Figure 2 shows what truly correlated market movements look like. Of course we’d expect the Nasdaq and the S&P 500 to be correlated, because the latter is essentially derived from the 500 largest stocks traded on markets, such as the Nasdaq. So do we see any hints of similar correlation between the Nasdaq exchange and BTC valuation?
Figure 3 fairly clearly indicates there is little to no such correlation between the two markets.
Note that the above plots (Fig. 2, 3) do not show market volatility, but rather daily market movements in the respective market pricings. Volatility calculations account for an asset’s relative valuation, while this ‘market movement’ metric is simply the absolute daily change in price ($USD).
Before the latest price correction last week, BTC volatility was less than that of the S&P500 for three straight weeks — granted, this was somewhat of an abnormality for Bitcoin, historically speaking. This stability in BTC, relative to the Nasdaq, shows up in Figure 3 as a flip from very high BTC market movements to relatively low movements over the same period as the opposite trend in Nasdaq movements.
As the total market share of Bitcoin continues to grow towards that of well established markets, it will be interesting to see if further so-called reverse-correlation patterns emerge. Because the Bitcoin network has been built from the ground up to be a standalone market, I believe that such reverse-correlations are likely to emerge as Bitcoin continues to grow in popularity as a hedge against other mainstream markets.
For example, major recessions in global mainstream markets may very well drive major BTC bull market cycles as investors rush to buy BTC in order to safeguard or hedge their portfolios.
Over the past seven years, market movements in the trading price of Bitcoin have been uncorrelated with those of the Nasdaq. As global adoption of Bitcoin continues to grow, reverse-correlation patterns between BTC and mainstream markets may continue to emerge.
This probably comes as a surprise to nobody, as one of the biggest offerings of the Bitcoin network (along with its derivatives) is precisely that it is a standalone marketplace, completely independent from other markets. Here, I’ve presented just a few more graphs to support this reality.