Ecoinometrics - July 20, 2020

Understanding Bitcoin's correlation...

It is good to have some context when you try to interpret numbers. That’s true whether you look at the size of a price action or when you want to try to make sense of asset correlations...

The Ecoinometrics newsletter decrypts Bitcoin’s place in the global financial system. If you want to get an edge in understanding the future of finance you only have to do two things:

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People are worried about correlations

This has been a trending topic for the past few weeks. You have heard this:

  • Is Bitcoin correlated to the SP500?

  • Does that mean Bitcoin cannot be used to diversify my portfolio?

  • Why is  the correlation so high?

  • How long is it going to last?

  • What has changed in the market?

Good questions. So what has changed actually? 

I think if you just look at the correlation score between Bitcoin and the SP500 you might get scared a little. The current score is 0.64 on a 30 days basis. That’s starting to be pretty high.

In the past, the typical range has been something like -0.25 to +0.25. That basically means uncorrelated. Jumping to values above +0.50 in a few months is of course worth our attention. 

To understand what happened you have to follow the price action in chronological order (follow on the charts below):

  1. At the end of February the stock market takes a dive. All the leveraged traders and their moms are hit by margin calls. This is a liquidity crisis. People sell all their hard assets to raise cash and weather the storm. In that situation both the SP500 and Bitcoin are crashing. Naturally the correlation is rising.

  2. Next the “Fed put” kicks in and the stock market starts to rally. Of course people also buy Bitcoin on the cheap at the same time. Simultaneous rally equals again high correlation.

  3. Then we get a rally fatigue. The stock market and Bitcoin start trading sideways. At the same time you can see that the Bitcoin vs SP500 correlation is decreasing all the way down to +0.25.

  4. But Bitcoin is also experiencing a crash in volatility. Most of the price action starts being focused on the short term. As volatility comes down correlation moves back up.

I think there is nothing unexpected in this sequence.

If you think about it Bitcoin is doing what you’d expect from a safe haven. During a liquidity event it is sold to raise cash. After the liquidity event it recovers its value. 

Over the long run you expect that it will rise above pre-crisis levels as more people want to park their cash in a hard asset.

Right now Bitcoin is stuck in a low volatility environment. There is no FOMO so whales have all the power when it comes to triggering price actions. My guess is that a few whale trades from now Bitcoin will break out of this tight range, volatility will return to the market and the correlation with the SP500 will break down.

Let’s see how that plays out.

Pivoting to accommodation

Listen! Listen good people of the world! The Fed has spoken! And their diagnosis is that the US economy is in deep shit.

No kidding. 

The unemployment level is higher than at the top of the 2008 crisis and we aren’t even done with the coronavirus pandemic.

Of course that means the Fed will have to do even more to save us all. 

Flooding the market with trillions of USD wasn’t enough. Buying junk bond ETFs wasn’t enough. Buying Apple bonds on the secondary market wasn’t enough...

Next step is yield curve control and even more direct interventions in the market.

They now swear that interest rates will not go up until the CPI numbers hit 2%... I’m not holding my breath on that. 

Read the article.


Grayscale published its quarterly report for Q2 2020. It is worth a read. Here are a few takeaways:

  • Bitcoin crashed by 40% and then recovered completely. Meanwhile investors are buying at Grayscale with an inflow twice as large as Q1.

  • Most of the almost $1 billion inflow went to Bitcoin.

  • 84% of the inflow comes from hedge funds. Hedge funds are always early institutional investors.

This is good for Bitcoin.

Read the report.

Controlling the narrative

Reading this article made me think about the importance of controlling the narrative. 

For sure, on a fundamental level Bitcoin is the hardest money out there. So on fundamental principles it should win and be used to rebuild the global financial system.

But what if nobody cares? Well if nobody cares this might never happen. That’s why controlling the narrative is important. 

Show people why they need Bitcoin. Show people what Bitcoin can do for them. Any occasion is good for that and that includes the Twitter hack.

IMHO this is good for Bitcoin.

Read the article.

Orders of magnitude

You know, it is always good to have some rough numbers in mind when you discuss a topic. You might avoid making useless points, such as this from a Bloomberg article on the Twitter hack:

“Bitcoin fell as much as 1.9% in Thursday’s session...”

I read that and I’m like… dude -1.9% for Bitcoin is nothing. One standard deviation on the distribution of Bitcoin daily return is about 4.8%... so yea there is basically nothing to see here.

Read the article.

The Ecoinometrics newsletter decrypts Bitcoin’s place in the global financial system. If you want to get an edge in understanding the future of finance you only have to do two things:

  1. Click on the subscribe button right below.

  2. Follow Ecoinometrics on Twitter at

Done? That’s great! Thank you and enjoy.