Major Bitcoin Theory Debunked By Watching ChartsJune 19, 2018
Since the major price growth for both trading sectors during 2017, the belief that the stock market moves in unison with Bitcoin has gained widespread acceptance.
However, as reported by the CNBC, a chart watcher has something else to say about that correlation theory and the truth –or lack thereof- inherent to it.
A “Theory” Built On Assumptions
Charlie Bilello, research director at Pension Partners, was quoted on Thursday as saying that people just assumed that the theory was true because, in 2017, the equity market had a very profitable year and that also matched the 1,000% growth that Bitcoin and other Cryptocurrencies were enjoying.
During his talk at the Trading Nation programme of the CNBC, he said that the theory is based on a simple assumption that, since both grew at the same time, then they both may decrease at the same time.
The Correlation Becomes Questionable
While both assets did show evidence of a lower dual move for some time earlier this year, Bilello says that the relation did not hold up for long and it has broken down.
The S&P 500 has suffered a 12% tumble from its January 26th record high to a significant low on February 9th. The drop for Bitcoin during the same time window was a marked 33%. However, that is apparently the last joint movement between the two forms of assets. Bilello said that, since then, the collapse of the correlation has been evident.
Bitcoin has suffered a decrease of 60% since its peak in December last year; however, the S&P –the one that was apparently synced with BTC- has actually gained a 4% increase in the same period.
Long-Term Data Delivers a Final Blow
If the investigation is taken much further in history, to 2010, the comparisons between Bitcoin and the S&P show no correlation whatsoever. Bilello says that having zero correlation does not mean that the assets will never move in the same direction. The period of time between December 2013 and January 2015 was the time set for the last critical crash for Bitcoin. However, while Bitcoin suffered the fatal fall for 85%, the S&P 500 actually enjoyed a 12% increase in the same period.
Correlation Does Not Mean Causation
The CNBC quotes Bilello as saying that separating correlation from causation is what must be done. He does not believe that there is a fundamental cause for stocks and Cryptocurrencies to move together. The most important fact to consider, according to Bilello, is that stocks are tied to earnings when it comes to what determines its value; an earnings stream held long-term is the most obvious cause for the increase in stock value.
On the other hand, the perceived value for Bitcoin is purely based on sentiment. People assume that the reason for both assets to be tied is because of a risk appetite in both markets. And, while that is certainly true, it is necessary to make a separation between that particular fact and actual data.