Correlated or Uncorrelated to Other Assets, That Is the Question for Bitcoin

The correlation of Bitcoin with other assets is still debated.

In the Bitcoin world, a number of topics and debates have been recurring for years. I must admit that they will continue to animate the Bitcoin community, as well as the traditional financial world in the years to come.

One of the big debates that come up frequently is whether or not Bitcoin is correlated with other assets. A related debate is also often raised that questions Bitcoin’s role as a safe haven in times of crisis.

All sharp variations in Bitcoin price are therefore compared to those of gold prices, but also to those of financial market prices.

At the beginning of January 2020, the defenders of Bitcoin as a safe haven in times of crisis were able to strengthen their position at the height of the crisis between the United States and Iran.

On January 3, 2020, the assassination of Iranian General Qasem Soleimani in Iraq by the United States made the risk of a war between the United States and Iran imminent.

In the aftermath, the financial markets began to doubt for a few hours, before finally remaining fairly neutral for the next 10 days.

The most interesting thing is to follow the reaction of gold and Bitcoin during this ten-day period of doubt. Following this major geopolitical event, gold took almost 4%:

Gold price evolution after assassination of Qasem Soleimani

For Bitcoin, the reaction was even stronger. Having just dropped below $7K, Bitcoin reversed the trend to take more than 20% in a few days:

Bitcoin price evolution after assassination of Qasem Soleimani

For many Bitcoin supporters, this reaction of Bitcoin was proof, if proof were needed, that Bitcoin had indeed become a real safe haven in times of crisis.

One could even get the impression that this major global geopolitical event had reversed the trend in Bitcoin price. Thus, Bitcoin crossed the $10K mark again on February 9, 2020.

In the first forty days of the year 2020, Bitcoin showed a remarkable performance of +50%. A few months before Bitcoin’s third Halving, all signals were positive for Bitcoin.

During the month of February 2020, Bitcoin continued to see its price stagnate around $10K. As I explained at the time, this was a welcome consolidation phase.

While Bitcoin was still around $9.5K as of February 21, 2020, the financial markets began to take a hit following the rise of the coronavirus.

Its spread around the world had already begun, and the financial markets were beginning to enter a period of total uncertainty. Something that traders hated above all else.

In the last week of February 2020, the Dow Jones posted a loss of about 12%:

Dow Jones price fall at the end of February 2020

Over the same period, Bitcoin also plummeted from $9.6K to $8.5K, a drop of about 11%:

Bitcoin price fall at the end of February 2020

You will obviously have noticed that this downward trend of Bitcoin in the last week of February 2020 is close to the Dow Jones trend. I didn’t show you the S&P 500 chart, but the decline was of the same order.

For many, this was a sign of a clear correlation between Bitcoin and the financial markets. So they saw reasons here to be comforted in their beliefs.

And then came the weekend of March 7–8, 2020.

The previous week had already seen the markets contract sharply with the sharp increase in the number of coronavirus cases in Italy. Bitcoin had begun to fall back below $9K.

Saudi Arabia’s decision to walk away from the OPEC negotiating table to unilaterally lower the price of its oil barrels started the beginning of an oil crisis in the middle of the weekend.

With the financial markets closed over the weekend, investors quickly sought liquidity in the liquid market that never closes. And that is Bitcoin. Bitcoin lost 10% of its value on March 8, 2020, only to see its price drop to just under $8K.

Widespread panic then began to set in in the financial world as soon as the markets opened on March 9, 2020.

The price of Brent Crude collapsed by more than 20%. On Wall Street, the Dow Jones fell by about 8% on the same day:

Dow Jones price fall on March 9, 2020

The fact that Bitcoin started to fall first does not imply, however, that the financial markets are following Bitcoin price, you will agree.

At the same time, gold was rising, seemingly playing its role as a safe haven.

On March 10, 2020, Wall Street recovered, before finally dropping another 10% on March 11, 2020. At the same time, Bitcoin remained stable at around $8K showing no correlation with other assets as gold was still rising.

This week had started badly, but we were far from having seen it all. Thursday March 12, 2020 arrived. All of a sudden, Bitcoin started to drop like crazy as its price would drop almost 50% in a few hours from $8K to less than $4K before rebounding and stabilizing at around $5K.

At the same time, Wall Street plunged again and called on the Federal Reserve for yet another monetary stimulus. Gold was holding its own on this black day, causing some to say that Bitcoin was clearly not a store of value.

The next day, on March 13, 2020, gold started to lose 10% of its value confirming that its safe haven status no longer provided any protection against a potential fall in the crisis we are going through.

Total panic has gripped the world, and everyone is trying to recover as much liquidity as possible, creating a liquidity crisis. All liquid markets are being impacted.

Equity markets such as Wall Street, gold, or Bitcoin are all falling in a common way but there is no real causal link in the fall of these markets. Their common decline is simply related to the fact that they are liquid markets.

When everybody wants liquidity, these liquid markets are necessarily impacted. There is no longer a role for safe havens when there is total panic.

At the time of writing, it is March 18, 2020.

Wall Street seems to be strongly rejecting the Federal Reserve’s monetary stimulus. The 100 basis point interest rate cut, coupled with a $700 billion liquidity injection and the lowering of the reserve requirement for banks to zero, is not enough for Wall Street.

As a result, the Dow Jones has collapsed and just broke the 20,000-point threshold:

Dow Jones price evolution on March 18, 2020

A drop of more than 8% from the previous day’s value is underway. A first circuit-breaker has already been used. It would even seem that halting trading each day for 15 minutes is becoming the norm. Some are even now calling for a complete halting of trading for a given time on the financial markets.

Gold is also falling with a further 2.5% decline.

Bitcoin, on the other hand, remained neutral for a long time in the face of this sharp drop in the financial markets, and was slightly positive at +0.3%. Its price is now in the red but the fall remains very moderate:

Bitcoin price evolution

It is around -0.5%. The correlation with the fall of the financial markets is therefore clearly not real on this day of March 18, 2020.