Crypto Market Musings

Phew. June inflation numbers came in hot on Wednesday — and the markets mostly yawned. Bitcoin is trading (as of this writing) at around $20,000. It was trading around $21,000 last week. Ethereum is trading around $1,131. It was trading around $1,200 at this point last week. Considering inflation is up 9.1% year over year (the biggest single-year jump since 1981) and 1.3% since May (the biggest monthly increase since 2005), crypto prices could have fallen more sharply than they did. So let’s take a minute (or at least a few seconds) to celebrate the win. 

Okay. You’ve had your fun. Celebration time is over. Let’s take a deeper dive into the inflation data and the market reaction. Energy and food costs accounted for about half the monthly increase in inflation. The Consumer Price Index (CPI), which excludes energy and food costs, increased by 0.7%. But fuel costs have been retreating over the last few weeks. Over the past month, gas prices have dropped $0.38 cents a gallon, according to Oilprice.com. And gas inventories are increasing.

Other commodity prices are falling too. Wheat, copper, corn and lumber are all down from their March prices. Typically, falling commodity prices is a sign that inflation might be easing. Combine that with the expectations that the Fed will make another aggressive rate hike at the end of the month (either 75 or 100 basis points), and the market looks like it’s starting to feel comfortable with the idea that the economy is headed in the right direction in terms of inflation. This set of factors largely explains the market’s ho-hum reaction to June’s CPI report. The Nasdaq 100 was down just 0.1% on Wednesday. And because the crypto markets are currently correlated with equity markets (especially the tech sector), crypto saw only slight declines as well.

As expected, crypto lender Celsius has filed for bankruptcy protection. It paid off some major markers before entering bankruptcy proceedings. As a result, market reaction was muted. 

I’ve written (and talked) extensively about the crypto market’s correlation with the broader equity markets. But there’s another correlation that investors need to keep an eye on.

Right now, there’s a strong inverse correlation between the dollar and bitcoin. The stronger the dollar gets, the more bitcoin’s price falls. And the dollar is extremely strong right now.

This week, the dollar achieved parity with the euro (1 dollar = 1 euro) for the first time in 20 years. For people holding dollars, it’s a great time for a European vacation. Your purchasing power in Europe has never been better — at least in the euro era. But it’s bad news for crypto holders.

Correlation is measured on a scale from -1 to 1. The closer you are to 1, the more positive the correlation. A correlation coefficient of more than 0.4 is considered statistically significant. Correlations ranging from 0.5 to 0.7 indicate a moderate correlation. Correlations ranging from 0.8 to 1 are considered strong correlations. Two assets with a strong correlation means they will track each other closely in the same direction. So if asset A goes up, asset B will go up. And if asset A goes down, asset B will go down in a similar fashion.

That’s what’s happening with bitcoin and the Nasdaq Composite. The correlation coefficient between BTC and the Nasdaq Composite is +0.78, according to Cointelegraph. So when the Nasdaq Composite goes up, so does BTC. And when the Nasdaq Composite goes down, BTC goes down.

Inverse correlations work the same way. But instead of assets moving in the same direction, they’re moving in opposite directions. That’s what we’re seeing between BTC and the dollar. The stronger the dollar becomes, the lower bitcoin’s price goes.

Inverse correlation coefficients operate on the negative side of the scale. So the closer the coefficient is to -1, the stronger the inverse correlation.

According to Cointelegraph, the correlation between BTC and the dollar is -0.77. That means as the dollar gets stronger, bitcoin’s price drops by a corresponding amount. With more interest rate hikes coming — and Europe’s economy struggling — it’s likely the dollar will continue to grow in strength. And that doesn’t bode well for bitcoin’s short-term prospects.

And Finally…

The New York Yankees have launched a bitcoin savings plan for their employees. People who work for the baseball team can convert some of their post-tax salary into bitcoin with no commission through its bitcoin services provider NYDIG.

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