Over the last few days, especially in recent days, the news from wall street has changed a bit over-optimistic on the obviously depressing.
In one of the articles stated “the end of the honeymoon trump markets”, in other analyses not forthcoming the possibility of a major correction, and will it lead to a “multiyear bear market”. Behavior change is striking, and the cryptocurrency market is almost perfectly imitates him. Monitoring this situation raises two questions: first, how strong is the relationship between the traditional financial markets and cryptocurrency markets, and, secondly, in the case of this relationship, what might be its implications for cryptocurrency.
The question of the relationship:
The next part of the article is somewhat technical in nature. In short, the point is that the relationship between the markets is weak, but there is a noticeable relationship between the sentiment in both markets. The consequences of this relationship are discussed below.
It has taken many attempts to establish the qualitative value of the crypto markets and even the establishment of causality (a huge error in quantitative analysis). At the same time, relatively few have tried to quantify the relationship, if not to take into consideration several irrelevant articles. The best resource for this topic proved to Sifr Data — free data visualization tool on cryptocurrency. Among other visualizations, they have created a correlation matrix of cryptocurrencies, which displays the z-score (standard deviation) and p-value (probability) of the relationship between different assets.
For those who are not strong in statistics — the numbers on the first chart is called a z-score. They represent the direction and strength of the relationship between the two groups of data. The highest absolute z-score means greater correlation, and the lower absolute z-score less relationship. A positive or negative number indicates the nature of the relationship – direct or inverse:
The correlation matrix z-score. Its a little hard to understand, but you should pay attention to two numbers: BTC-S&P 500 (0,14) and S&P 500 VIX (-0,31)
S&P 500 due to its z-score is “weak direct relationship” with bitcoin. This is hardly interesting and according to our matrix is not statically significant. Now you should see the second number is a z-score VIX. -0,31 means “average dependence”. For the uninformed, the VIX is an index of the volatility of the stock market, also called the “fear rating”. This denotes the existence of a definite inverse relationship between the VIX and bitcoin. Earlier this year, it was well described in one of the articles, which contains the following graph:
Chart of correlation between VIX and bitcoin at the beginning of this year
This is an extremely interesting discovery. If so, this means that the reduction of fear in the markets, the price of bitcoin is increasing. Conversely, with the growth of fear the price of bitcoin falls. This makes bitcoin a risky investment, in contrast to more conservative investment options, like gold that are considered risk-free.
It also indicates that long-term bearish on the stock market of cryptocurrency will be worth even less for their exchange-traded counterparts. Conversely, in a bull market, their situation will be much better.
Correlation develops itself
Given this relationship, it is possible to analyse the recent market trends, which caused a rise in the VIX (115% today) and try to understand what is happening. On 5 February, the Dow Jones fell by 1175 points. This was the biggest drop in one day for more than 130 years history. However, given the recent meteoric rise, the fall in the percentage amounted to only 4.6%. To determine what this means for the market, you can just note that the Dow Jones lost all its growth for 2018. Even though it is bearish, but the trend is consequential. Unfortunately, the Dow Jones, not the one that felt the drop this Monday. Within a few days fell sharply, the DAX (Germany) FTSE (UK) and S&P (USA). Looking at this in combination with the cryptocurrency falling by 45% in recent weeks, it becomes clear why rising VIX, and the market fears.
What caused all this? Everyone has a theory, but there are two annoying reasons. First of all, this recent rise in 10-year yields from the Federal reserve that determines interest rates that are paid by the US government and the Americans on its debt. Rising interest rates may cause a decline in consumer spending and increase inflation. Both is a bearish signal. This, combined with the statements of famous economists/former Chairman of the Federal reserve (Alan Greenspan) on the approximation of “large-scale multi-year bear market” caused the rapid growth of the VIX index. In the cryptocurrency world it’s fear mongering, combined with the recent fall of prices, panic, retail investors and General FUD. Ultimately, this can lead to the formation of long-term bear market.
Of course, it is hoped that this will not happen. As we now know, the mood in the market affects the price of crypto-currencies more than anything else. Ahead of us are several interesting weeks.