Bitcoin and Stocks, is There a Long Term Correlation? – Trustnodes

Bitcoin and Stocks, is There a Long Term Correlation?


Bitcoin fan art, Nov 2019

Numerous studies have shown bitcoin is an uncorrelated asset. Yet if we zoom out a bit and consider correlation less as causation and more of a trend direction, the Dow Jones chart and that of bitcoin look a bit interesting.

Starting with the Dow Jones chart on monthly candles, we have a ten year long bull run, but also what can be called two lost years.

Stocks over a decade, Nov 2019

This is a beautiful chart and within it, it contains far too much information, but the bit we’re interested in is first that period from 2012 to about 2014.

So this goes from about 12,000 on the 3rd of January 2012, to 16,000 on the 2nd of January 2014.

Then, it keeps going up a bit, but not really. Between 2014 and around March 2016, it is sort of sidewaying, up and down, but still at 16,000.

In March then it starts taking off a bit, but little, to circa 18,000. It’s not until November 2016 that this starts having a bull run, from 18,000 to nearly 27,000 on the 2nd of January 2018.

Then, we have another circa two lost years, with Dow last month at 27,000 still. Up a bit this month to near 28,000. Meaning 2018 opened at 27,000 and 2020, now just weeks away, is still pretty much at the same level.

Bitcoin's long term price, Nov 2019

At first look, the bitcoin chart looks very different because it’s on weekly candles, the available timeline is shorter, and of course because its magnitudes of rise and fall are far bigger than for granny stocks.

Yet the trend is almost identical. So just to make it clearer, while Dow went up by a third from 2012 to 2014, rising from 12,000 to 16,000, bitcoin had its huge bull run, up 100x briefly.

Bitcoin, 2012-2016

That Jan 2014 peak gives way to a long sideway in 2015-16, which in stocks is far more measured without the drastic fall, but conceptually they’re both sidewaying as hindsight can now tell.

Then we have the take-off in 2016 to 2017, culminating in Jan 2018 for the entire crypto space as that’s when the peak was reached for eth, and the crash last year with some recovery this year.

For stocks, there was the near doubling in 2016-17, and then largely the sideways for now nearly two years.

The Fiat Dominance

So the correlation is not quite perfect, or anywhere near it, but the trend is largely the same. Why?

Presumably because they’re affected by the same factors, although to a very different degree.

If FED prints, for example, there are now more dollars in supply than assets, so assets have a bigger value against the dollar.

For CNY we call it devaluation. Same thing, although here it can be easier to get bitcoin than stocks, but CNY is worth less against both. Same with the pound.

Before reaching any conclusions we’d have to look at other assets, but we wouldn’t be surprised if the trend is the same for them all.

Money supply has the other equation of money demand, and that comes from economic growth. New apples created from nothing. New babies created from “nothing.”

That equation has two parts. The first one is that if too many apples are created, then too much money is sort of burned because this thin air money now meets a thin air product or asset, meaning the value of raw assets fall, meaning the increase in productivity leads to the fall of the value of artificial assets like stocks or bitcoin.

The other part is even more complex. If money is more thinly distributed, as it eventually will have to be, there is practically less money, so the value of assets is lower.

Meaning all assets in a way are affected by the same thing, FED’s, or more correctly BIS’ decision to increase or decrease the supply of fiat.

Bitcoin turns this on its head. It takes off FED and BIS and fixes the money supply so that the value of other assets fall or rise compared to it, rather than in the dollar where the value of the dollar falls or rises compared to other assets.

Stocks are arguably not much different, or gold, or houses, but while the supply of these assets can be changed, that of bitcoin can not.

The difference, however, is of degree. The concept is the same. All assets, including bitcoin, are at the mercy of FED. To escape that, bitcoin would need to be exchanged for actual goods, to be used as a unit of account to a great degree, but that is a most difficult task which is no where near being achieved.


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