A study that was published in the Annals of Operations Research looked at whether Bitcoin prices can be linked to economic fundamentals. A few crypto reporting websites have written about this study, and are echoing its findings that Bitcoin pricing does actually correlate directly with several economic principles. Although I was not able to access the study for an in-depth analysis, I did ask myself whether the claims might have any merit.
Is Bitcoin a non-correlated asset?
The idea that Bitcoin is a non-correlated asset is disputed in the study.
Bitcoin prices, despite their seemingly attractive independent behavior relative to economic variables, may still be exposed to the same types of market risks which afflict the performance of conventional financial assets.... - Dimitrios Koutmos, Worcester Polytechnic Institute
Koutmos's key finding was that several factors were "important determinants of bitcoin [sic] returns," when he examined daily Bitcoin prices between January 2013 and September 2017:
- short-term interest rates
- investors' expectations of stock-market volatility
- foreign-exchange volatility
Interestingly, the price of Bitcoin during times when the crypto market was less volatile was found to be affected by the following:
- general economic conditions
- inflation expectations
Question from a layman
Despite having no formal training in the field of economics, I do have an important question about the study.
How was the time period selected?
Is it simply a coincidence that the start of the time period being studied occurs roughly one year before a significant Bitcoin bear market? The Silk Road Bitcoin seizure occurred in October 2013, and Mt. Gox was hacked for a second time in February 2014. The most exciting parabolic rise of Bitcoin pricing is also excluded from the time period being studied. The timeline studied shows a relatively stable price history for Bitcoin.
My own pricing chart
I took the liberty of plotting the S&P 500 performance against BTC pricing from June 2013 to September 2017. That time period was chosen by me because I tried to emulate the time period selected in the study. Unfortunately, free data I acquired from Coinmarketcap and Yahoo Finance didn't extend to January 2013, but I think the resulting chart still provides a great graphic.
You can be the judge...does it look like BTC pricing correlates with the S&P 500?
I may not be an expert, but it looks to me that Bitcoin does act as a pretty good stock hedge. Hopefully you enjoyed my analysis of this topic!
Related reading: Have 20% of all Bitcoin really been lost forever? Part 1
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