When I sit down in the morning to log in and peruse the markets, I usually start off by scrolling through my newsfeed on Twitter.
Given I have to cover several markets simultaneously, I’ve curated all the people I follow into broad categories and assigned them to lists that I can separate out. I’ve got a feed for macroeconomics, a feed for metals and mining, a feed for oil and gas… you get the picture.
One market I haven’t really covered much, however, is Bitcoin and other cryptocurrencies.
For the second time this year, the cardinal cryptocurrency has plummeted double-digit percentages in a single day — each one shot across my Twitter feed by Bloomberg’s Joe Weisenthal.
Source: Joe Weisenthal
That was followed in rapid succession by a flurry of posts from other people stepping outside of their usual comfort zones to comment on crypto markets… and those opinions were all over the place.
As such, I thought it would be helpful to do a quick refresh of the assessment I did back in November.
Just as a refresher, the analytic approach I like to take with commodities and currencies — especially when price movement is particularly strange — is to look at correlations.
Two things are said to be negatively correlated to each other when they tend to move in opposite directions, as with the dollar and gold in the chart below from April through August 2018.
Source: twitter.com/TheStalwart/status/1346038379960537089
On the other hand, if they tend to move in the same direction, they are said to be positively correlated, just like the dollar and gold from October through November 2018.
When I last looked at bitcoin, however, I was focusing on its correlation to gold, which had just begun to break down… and has since broken down further.
Source: Bloomberg, Seawolf Research
While I was correct at the time that we’d see a correction in bitcoin — that happened two weeks later — it rebounded to prior highs within a couple of sessions.
And in late December, it absolutely exploded, moving up almost 175% to its high point last week before pulling back to its current levels.
Source: Bloomberg
So, it’s probably no surprise that after a move like that, the question I’ve been asked the most over the past couple of days is… which direction is it going from here?
Well, the answer likely lies in the near-term performance of a different currency… the US Dollar.
Since putting in its high at 103 during the coronavirus lockdowns last March, the US Dollar has been absolutely torched, making lower highs and lower lows for nearly the entire duration since.
Source: Bloomberg
But it’s been during the period since we last looked at bitcoin in November where it has fared the worst, failing to take out a single resistance level to the upside during this period.
And it probably comes as no surprise that almost all other asset classes — commodities in particular — have done well over that time.
Since the beginning of December, lumber is up 38%, iron ore and steel are up over 30%, nickel is up 20%, gasoline is up 20%, oil is up 14%, corn, soybeans, wheat and milk are all up over 10%, copper is up 6%…indicating that inflation is ramping up in the economy.
And with the U.S. Dollar Index mired between its last mid-December high at 91, and its Jan. 5 low just above 89, it’s clear the current trajectory remains lower.
Source: Bloomberg
While short bets on the US Dollar aren’t quite at all-time highs, they’re close.
Source: Bloomberg
Which means in turn that while this bearish dollar trade is still working, we need to be cognizant of a potential unwind.
And while longer-term negative correlations between the DXY and equity/commodity markets remain intact, they are getting a little smaller.
Source: Bloomberg, Seawolf Research
If this slowdown in correlation for bitcoin and commodities moves out to the 30-day and beyond, it becomes a trend, which likely involves a downward shift in performance.
So, while I think we do see a rebound in bitcoin prices here, it’s still too early to tell if there’s enough downside in the dollar left to get crypto back to all-time highs.
However, my eyes tend to focus more on the 15/30-day gold correlation, which flipped back to more typical negative values.
If that trends for a month or so longer, we could see gold prices — mired in a slump for months — break out of their shell.
For now, though – with stimulus on its way in just a few weeks — we wait.
All the best,
Matt Warder