** Data taken at 9:43, 12/06/2020*
Written by: Yves, Head of Trading at Wirex
The Bitcoin market finally broke its bullish trend yesterday after three months of continuous increase and could fall further down next week. The price drop of nearly 10% from peak to trough followed the downturn observed on the Equity markets that started hours before. The Equity correction is probably long overdue because of the clear divergence between Wall Street and Main Street, but in this case, it was most likely triggered by the rise in the US Covid-19 cases to new heights. John Hopkins reported on Thursday more than 2 million confirmed cases in the US since the start of the sanitary crisis, and states are reporting a surge in the number of hospitalisations.
The ‘Equity (S&P 500) vs Crypto (BTC/USD)’ markets daily correlation since February 1st is close to 27%. This absolute figure could mean anything if it is considered on its own. As a reference, correlation would be typically 35% to 60% higher between Broad Equity Indexes (e.g. SX5E Index and S&P 500).
If we look at a graph, depending on the zoom level, and the parameters (e.g. daily or weekly?), we can try to guess how correlated Equity and Crypto markets are. There is definitely à positive correlation, but it is not likely to be an 80% correlation, and the correlation could be higher in severe equity downturn events.
*Data sourced from Bitstamp and investing.co.uk for both graphs
Looking at the 3M rolling correlation, it is also clear that we’ve experienced serious de-correlation in May, but the level was back to a local peak this week (above 15%). These correlation peak levels (in March and last week’s) are the highest this year. However the Bitcoin downward movement this week is far from the top 10.
The growing correlation in markets, and specifically during downturns, could suggest that institutionals are weighing heavily on the market direction: institutionals are selling. However institutionals should also be active on the derivatives markets in such a high volatility scenario. The derivatives market is mostly an institutional playground.
In fact, the options interest remained steady and the ATM volatilities implied from the 1-month, 3-months and 6-months maturities are actually decreasing. They are very far from the March levels when the sanitary crisis pushed implied volumes above 150%. Volatilities are now almost back to pre-crisis levels between 60% to 70%.
When it comes to Bitcoin, the institutional risk is on the upside.
Institutionals seem to be concerned about a potential increase in the Bitcoin price. They are more likely to get involved in the options markets to cover an upside risk.
This is why the growing activity in the derivatives market could be considered as a bullish signal rather than a bearish one. The lower activity in derivatives markets translates into either a bearish or at least a stagnating signal.
It is interesting to observe the decrease in the Bitcoin implied volatility, when, in sharp contrast, the ATM Equity implied volatility (the VIX Index) jumped by close to 13 points (+48%).
On the supply side, the Bitcoin halving is making more victims among China’s miners where more rigs are either shutting down or relocating. TokenInsight published an analysis on Bitcoin Mining noting “the decline in the proportion hash rate”. The Chinese average miner’s profit margins have declined and are close to nil, when international miners (U.S) profits are slowly increasing, taking advantage of a more efficient and cheaper power, one of the few positive consequences of the sanitary crisis.
TokenInsight also mentions that the “Bitcoin’s annual supply growth rate is about 1.7%” which is lower than Gold’s supply growth (4.8%). Although Bitcoin has yet to prove its resiliency in light of March and last week’s downturns, it is structurally and with a long term perspective, always an interesting argument for a HODL investor.
Last but not least, Bitcoin has clearly set a bullish pace that most altcoins are failing to keep. The XRP/BTC price has reached a record low level. Although Ripple’s partnership with MoneyGram is reported to help MoneyGram achieve a “100% growth on digital transactions”, the community is getting impatient and XRP could lose its fourth place to Stellar. The Stellar Development Foundation has cut significantly its token supply this year and taking further steps to bring confidence. Crypto News Flash reported à partnership between Stellar and Elliptic for the setup of a compliance tool.
The above is an opinion piece and therefore should not be taken as financial advice. Please do your own research thoroughly when looking at Cryptocurrency.