Generally, hedge funds will introduce correlation indicators as an important reference for investment and asset allocation. By reviewing the correlation trend between BTC and the Nasdaq 100 index (NDX 100 index) in the past four years, it can help us eliminate the noise of the market, remove the false and save the truth, and extract the key factors that really affect the market trend.
Indicator selection instructions:
Nasdaq 100 Index (NDX100):
In the stock index selection, we mainly consider the Nasdaq 100 index. The index includes the top 100 largest non-financial companies by market capitalization listed on the Nasdaq market. At present, 56% of the weight of the index is technology companies, including Tesla, Apple, Google, Nvidia, Netflix, etc., followed by consumer service companies, such as Amazon, Starbucks, etc. The market value of BTC in the currency circle and the industry attributes of the blockchain, NDX100 and BTC have strong similarities and comparability.
Monetary policy and macro-level indicators:
Considering that the overall currency circle and the stock market have been greatly affected by macro trends and monetary policies in the past four years, and various related interpretations on the news surface are overwhelming and numerous, ordinary investors often feel overwhelmed. This analysis also lists the main indicators of macro and monetary policy. In the extended time dimension, we can have a glimpse of the real relationship between market trends and macro.
Federal Funds Rate:
The federal funds rate is the target interest rate guideline regularly set by the Federal Reserve’s Monetary Policy Committee. According to this rate, commercial banks borrow excess reserves from the Federal Reserve or other banks overnight to meet reserve requirements, which can be understood as the lowest cost of capital in the U.S. financial system. This rate is one of the important tools of U.S. monetary policy.
U.S. 10-year Treasury bond yield:
The 10-year Treasury bond yield can be understood as the lowest cost of capital for companies. Investors in bonds, stocks, commodities and real estate generally use the 10-year Treasury bond yield as a measure of the opportunity cost of capital, so fluctuations in the 10-year Treasury bond yield usually directly affect the pricing of major asset classes.
The size of the Fed’s balance sheet:
The expansion and contraction of the Fed’s balance sheet equates to easing and tightening of monetary policy. According to the Fed’s own research, the impact of asset contraction of 2.5 trillion is equivalent to raising interest rates by 0.5 percentage points (Substitutability between Balance Sheet Reductions and Policy Rate Hikes: Some Illustrations and a Discussion1). This indicator needs to be looked at in conjunction with the federal funds rate.
Correlation coefficient (CC) and BTC independent market:
The correlation coefficient is an indicator of the strength of the existing relationship between two different variables, x and y. A linear correlation coefficient greater than zero indicates a positive correlation. A value less than zero indicates a negative relationship. A value of zero indicates that there is no relationship between the two variables x and y. Note that CC can only measure the correlation between the two, not the proportion of their respective changes.
When comparing the relationship between BTC price and the NDX100 index, we used the CC indicator (purple area). The larger the purple area on the horizontal line, the greater the positive correlation between the two; the larger the purple area below the horizontal line, the greater the negative correlation between the two; the closer to the horizontal line, the smaller the correlation between the two.
In general, it can be seen from the figure below that the positive correlation between BTC price and stock index has a gradually increasing trend. However, there are also multiple stages in the middle where the trend of the two shows a weakening of positive correlation or even a range of negative correlation (marked with a red box). This interval shows that BTC has gone out of the independent market with the stock market, and it is worthwhile to focus on the reasons behind its formation.
- Market summary:
The entire 2018 was a big bear market for BTC, which fell from 16,000 at the beginning of the year to around 3,500 at the end of the year, a drop of as much as 78%. During the same period, the NDX100 index rose by 18% from 6500 at the beginning of the year to 7660 at the end of August. After that, the stock index fell and fell back to 6500 at the end of the year.
- Macro progress:
On February 3, 2018, Powell took office and adopted a hawkish policy, raising interest rates 5 times in the entire 18 years, and the reduction of the balance sheet has also accelerated significantly. But the Trump tax reform bill passed in January 2018 lowered tax rates and a $2 trillion infrastructure plan. Conservative monetary policy and aggressive fiscal policy offset each other. Conservative monetary policy has limited impact on the entire market. On October 3, Fed Chairman Powell’s hawkish speech led to a rapid rise in U.S. bond yields, and the three major U.S. stock indexes collectively dived. Despite the mid-month rebound, numerous companies reported missing revenue and forward guidance in the late-October earnings season, sparking a fresh sell-off.
On October 31, 2018, the Federal Reserve did not replace the $23 billion in new bonds released by the Treasury bonds due on that day, thus setting a new record for the scale of a single-week shrinking of the balance sheet. The Fed reduced its balance sheet by a total of $33.8 billion that week. As of November 7, the Fed’s total assets and liabilities had shrunk to $4.14 trillion, the lowest level since February 2014, and a total reduction of more than $320 billion.
- BTC’s independent market:
In 2018, the entire BTC market fell sharply from a high level due to the impact of the ICO bubble burst in 2017. In the middle of the year, when the stock market stabilized and rose slightly, it did not follow the rising trend, but continued to consolidate at the bottom. At the end of the year, monetary policy The tightening has affected both the stock market and BTC.
- Market summary:
In 2019, the price of BTC resumed its upward trend, rising from 3,500 at the beginning of the year to around 11,500 in early July, an increase of 228%; it fell in the second half of the year, falling to 6,900 in early November at most, and closed at around 8,700 at the end of the year. During the same period, NDX100 rose from 6800 at the beginning of the year to around 9300 at the end of the year, an increase of 37%.
- Macro progress:
On July 31, the Federal Reserve announced a 25 basis point interest rate cut after the meeting on interest rates, lowering the target range of the federal funds rate to 2% to 2.25%, the first rate cut since December 2008. At the same time, the Federal Reserve also announced that it will end the balance sheet shrinking policy known as quantitative tightening by the market two months ahead of schedule.
In the early morning of September 19, the Federal Reserve announced an additional 25 basis point interest rate cut, which was also the second rate cut by the Federal Reserve in 50 days; at the same time, the Federal Reserve also cut the interest rate on excess reserves by 30 basis points. Powell said the issue of when to expand the balance sheet will be revisited, possibly sooner than expected.
At 02:00 on October 31, the Federal Reserve cut interest rates by 25 basis points, and the target range of the federal funds rate was lowered to 1.50% to 1.75%, in line with market expectations. And just after this rate cut, the Fed signaled that it would pause rate cuts in the future. The Fed’s statement removed language that it had said it would “act as appropriate” to maintain the economic expansion, indicating they believe easing may be over for now. The reduction of the table continued for two years, and the scale of the reduction reached 44,600-37,700 (September 2019), and the total scale of the reduction was 690 billion.
On the afternoon of October 24th, the Political Bureau of the Central Committee of the Communist Party of China conducted the 18th collective study on the current situation and trends of blockchain technology development. Xi Jinping, General Secretary of the Central Committee of the Communist Party of China, emphasized when presiding over the study that the integrated application of blockchain technology plays an important role in new technological innovation and industrial transformation. For such heavy positive news, the price of BTC did not rise but began to fall after the news was released. It is not ruled out that there are big funds selling the news.
- BTC’s independent market:
The correlation between BTC and the Nasdaq has maintained a certain degree of positive correlation since the beginning of the year. Until September, BTC began to decline. However, due to dovish policies such as interest rate cuts and expansion of balance sheets, the stock market started a large increase in the year during the same period. 7800 rose to 9000 points, an increase of 15%. We believe that the BTC market in the first half of the year is partly due to the fact that there are funds to start planning for the BTC halving in May 2020 one year ahead of schedule. At the end of the year, BTC did not follow the rise of the stock market. It is speculated that part of the reason is due to large funds selling the news.
Observing the independent market of BTC in 2018/19, it was found that BTC did not follow the stock market rise twice when the monetary policy turned better, and it seemed to be digesting the impact of the ICO bubble burst in 2017.
- Market summary:
In 2020, BTC rose from 9,300 to around 38,000 at the end of the year, an increase of more than four times, but most of the increase occurred in the fourth quarter, and the price of BTC in the first three quarters was around 10,000. In terms of NDX100, due to the new crown epidemic at the beginning of the year, the index fell from 9,000 points to around 7,000 points in mid-March, and rose under the stimulus of the Fed’s easing policy. doubled.
- Macro progress:
On March 15, 2020, in an effort to mitigate COVID-19, the Federal Reserve shifted its quantitative easing target to support the economy. The Fed announced a direct cut of 1.5 percentage points in the federal funds rate on the same day. Reduce the funds rate to 0% to 0.25%. It said it would buy at least $500 billion in U.S. Treasuries and $200 billion in government-guaranteed mortgage-backed securities “in the coming months.” These moves quickly boosted market sentiment, and the stock market went out of a V-shaped reversal.
These policies led to the rapid expansion of the Fed’s balance sheet, from 4.2 trillion in March to more than 6 trillion at the end of the year, an expansion of more than 50% in less than a year, which is rare in the world. The federal funds rate has remained close to zero throughout the year.
- BTC independent market:
BTC maintained a high correlation with NDX100 throughout the year, fell to around 5000 with the general trend at the end of the first quarter, and then followed the stock market to rise. During the DEFI summer in the second and third quarters, BTC was basically consolidating around 10,000, and in the fourth quarter, it went out of a market that nearly quadrupled. During the DEFI summer, the amount of funds locked on the entire ETH chain surged 6 times from 20 billion at the beginning of the year to 120 billion at the end of October, attracting a large number of new users in the currency circle, especially institutional users, which is the price of BTC in the fourth quarter. one of the reasons for the surge.
At the same time, the production of Bitcoin was officially halved in May 2020. Although there are already funds in 2019 to expect the halving income, we observed that the changes in the currency price were not large in the five months before and after the halving. The BTC market did not start until the fifth month after the official halving took place.
This big market started in October 2020 and lasted until March 2021. Bitcoin went from 10,000 to 60,000. During this period, it experienced two macroeconomic benefits but did not follow up (the previous round of bubbles was digested for a long time), and it has experienced historical One of the biggest water releases, experienced a substantial increase in new investors brought by DEFI summer, a large influx of traditional corporate and institutional investors (see appendix), and the benefits of halving. A feeling of being late.
- Market summary:
In 2021, BTC surged from around 38,000 at the beginning of the year to a high of nearly 60,000 in the first half of the year, then adjusted to an annual low of 32,000 in mid-July, and surged again to a peak of around 69,000 in early November, and closed at around 43,000 at the end of the year. Up 43%. The NDX100 index rose from 13,000 at the beginning of the year to 16,500 in mid-November, and closed at 15,600 at the end of the year, an annual increase of 20%.
- Macro progress:
Easing policies in response to the Covid-19 pandemic continued throughout 2021.
At the FOMC meeting on November 3, 2021, the Fed began to release hawkish signals, announcing a tapering of the pace of asset purchases, with monthly purchases of $10 billion in U.S. Treasuries and $5 billion in MBS.
At the end of 2021, the inflation rate in the United States will reach 6.8%, well above the Fed’s 2% target, the overall unemployment rate will be reduced to 4.2%, and the labor market will be close to the Fed’s “maximum employment” target. At its December 2021 meeting, the Federal Open Market Committee, the Fed’s policymaking committee, said most of its members expected to raise interest rates by three-quarter percentage points in 2022, while reducing the size of the balance sheet. Doubled the pace, cutting US Treasuries by $20 billion and MBS bond purchases by $10 billion per month. The meeting marked the official start of austerity.
- BTC independent market:
This year, BTC went through two independent markets, from mid-February to mid-July, and the correlation gradually changed from positive to negative; the second time was from the beginning of November to the end of the year, and the correlation dropped significantly.
In the first independent market, the price of BTC tried to break through 60,000 four times. From May 3rd to 17th, it fell directly from 57,000 to 35,000 in half a month, a drop of 39%. On May 19, China announced a ban on mining, which led to the shutdown of a large number of miners, and the computing power reached a historical low.
After BTC failed to hit 60,000 for the first time in mid-February, Grayscale’s GBTC market began to change significantly, and the GBTC premium began to turn from positive to negative, marking that a large number of institutional investors began to stop entering the crypto market, and even began to withdraw.
After failing to hit 60,000 for the second time in March, Musk began to cheer for BTC: not only did Tesla accept BTC as a means of payment, but Tesla also announced the purchase of BTC as a reserve asset. In hindsight, influencers taking advantage of market sentiment to call orders usually mean that the price has reached a staged top.
In the second independent market at the end of the year, BTC dropped rapidly from an all-time high of 69,000 in early November to 42,000 at the end of the year, a drop of 40%. In the same period, NDX fell from a high of 16,500 to 15,600, a drop of only 5%. In hindsight, this drop was a reaction to the Fed’s policy shift, and it is clear that BTC is more sensitive to macro-level changes than the stock market over the same period.
Before the Fed’s official interest rate meeting announced in December, the interest rate meeting on November 3 had already reduced bond purchases. BTC peaked after 5 days, first in the institutional market: in the first two weeks of November , the discount rate of GBTC suddenly dropped from about 10% to 25%. At the same time, from December 4th to 6th, the BTC futures market also saw a sharp drop in open positions, from 23 billion to 16 billion, which accelerated the spot market. the fall.
By observing the independent market stage of BTC from 2020 to 2021, we can see that after the last round of sharp rises, BTC was subject to periodic price pressure levels, and only corrected downwards after several upward surges. At the same time, due to the entry of traditional institutions in this round, the substantial outflow of funds from related derivatives markets such as GBTC or futures often points to periodic price highs. It is also because of traditional institutions that BTC price trends are more sensitive to macro-level changes than the stock market.
Through the investigation and analysis of the correlation between BTC price and NDX100 index, we can draw the following conclusions:
- The overall price trend of BTC is more and more positively correlated with NDX100. If there is a decline in correlation, it is generally because of certain factors in the BTC market that have caused BTC to move out of the independent market.
- BTC tends to take a long time to digest the impact of a bubble burst. Observing the independent market of BTC in 2018/19, it was found that BTC did not follow the stock market rise twice when the monetary policy turned better, and it seemed to be digesting the impact of the ICO bubble burst in 2017. Starting from October 2020 and continuing to March 2021, Bitcoin went from 10,000 to 60,000. During this period, it experienced two macroeconomic benefits but did not follow up (the previous round of bubbles was digested for a long time), and experienced the largest water release in history. First, after the substantial increase of new investors brought by DEFI summer, the influx of traditional enterprises and institutional investors (see appendix), and the benefits of the halving, surrounded by many benefits, this big market is quite a lot. A feeling of being late.
- BTC is more sensitive to changes at the macro level than the stock market. By observing the independent market stage of BTC from 2020 to 2021, we can see that after the last round of sharp rises, BTC was subject to periodic price pressure levels, and only corrected downwards after several upward surges. At the same time, due to the entry of traditional institutions in this round, the substantial outflow of funds from related derivatives markets such as GBTC or futures often points to periodic price highs. It is also because of the intervention of traditional institutions that the price trend of BTC is more sensitive to changes at the macro level than the stock market.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/what-is-the-correlation-between-bitcoin-and-us-stocks-in-the-past-four-years/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.