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29 Nov 2022

Softening correlations – new regime?

In light of crypto-specific contagion, correlations between BTC and U.S. equities have naturally declined. Correlations have remained soft since the FTX collapse, assessed through both long-term rolling correlations and granular intraday price patterns.
60minroll
Source: Tradingview (CME, Coinbase)
In light of crypto-specific contagion, correlations between BTC and U.S. equities have naturally declined. Correlations have remained soft since the FTX collapse, assessed through both long-term rolling correlations and granular intraday price patterns. Bitcoin did not absorb the positive equity response to the lower-than-expected CPI release of November 10 as contagion occupied bitcoin traders’ mindshare, and since, the economic calendar has been quiet. Bitcoins reduced market cap, reduced liquidity, and 77% drawdown may lead to stickiness of a weaker correlation between BTC and U.S. equities. The lower market cap, currently sitting at $317bn, has led BTC’s size to reach a less relevant size related to potential beta exposure to macro headwinds. Further, the reduced liquidity in the markets may disincentivize sophisticated funds to employ macro trading strategies associated with BTC. Lastly, the 77% decline from ATHs may represent levels at or near prices where determined buyers seek to build exposure regardless of the economic climate. However, the last few weeks have been slow related to economic data. Activity will gradually pick up in the coming weeks. Nonfarm payrolls and a Jerome Powell speech this week may provide clues whether the structural correlations have calmed. We’ll have to wait until the December 13 CPI release and December 14 FOMC press conference to assess whether the correlated relationship has firmly softened.
ndqcor
Preview
Source: Tradingview
Firming correlations
The rolling 30-day correlation between BTC and Nasdaq currently sits at 0.5, down from 0.75 in early October. Intraday correlations have also evidently softened since the FTX collapse, and the trend seems to hold through also last weeks as the market activity has slowed down. However, one should be aware that last week was particularly slow across markets due to thanksgiving.
60minroll
Preview
Source: Tradingview (CME, Coinbase)
From October 10 to November 4, BTCs 60 minute rolling correlation to the Nasdaq averaged 0.72 as U.S. markets opened and remained above 0.6 until markets closed. In the last few weeks, correlations have been far softer, trailing in the 0.2-0.4 range during U.S. market hours. By assessing granular correlations, we may get a sense of more nuanced correlation relationships in the market. We will monitor this trend closely as we approach a more hectic macro environment.
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