Bitcoin’s high correlation with copper does not bode well for short-term investors

Bitcoin’s high correlation with copper does not bode well for short-term investors

The bitcoin price is now more strongly correlated with copper futures than with traditional stock indices.

BTC’s correlation coefficient with respect to copper rose to 0.84 from 0.27 last month and reached its highest point since August.

The correlation coefficient ranges from -1 to 1 and measures the price relationship between two assets. The former indicates an inverse relationship, while the latter implies a direct price relationship.

But this closer relationship raises some questions:

  • Analysts often view copper as an indicator of overall economic growth and affectionately call it “Dr. Copper” for its ability to predict trends. Does this suggest that the macroeconomic narrative within the digital asset space will continue?
  • Why has the relationship between traditional commodities and copper weakened in the last two months? By October 6, the S&P 500 correlation was at a high 0.86 before falling to its current level of 0.14.

Regarding the first question, I would say yes. Short of a black swan or specific negative contagion event from a centralized entity, digital assets still appear to be highly connected to macroeconomic developments.

But, in particular, yields on federal funding rates and on three-month and two-year US Treasuries outperformed the 10-year yield.

This situation, called an inverted yield curve, has preceded previous economic downturns. Taken in isolation, an inverted yield curve does not bode well for bitcoin or copper prices. Rising short-term rates and slow economic growth would lead to lower demand and prices for both physical and digital assets.

However, the particular chart for copper is nowhere near as gloomy.

The metal’s price has risen close to 3% over the past month on mounting momentum and steady volume. The 10-day moving average also broke above the 100-day moving average, which would indicate a bullish signal.

On the second point, commodities could be trading at an unwarranted premium right now. ACoinDesk articleTuesday highlighted the way commodity trading has become misaligned with fundamental information and delinked from its normal relationship with the two-year Treasury yield.

Given the breakup and the price of copper, traders may be waiting for a reversal in commodities to trade accordingly.

Unfortunately, bitcoin traders don’t have much reason to be bullish on near-term price valuation at this point.

In the last 30 days, prices have been moving within the same range and everything indicates that it will continue to be so.

Sentiment followed the same pattern and the Fear and Greed Index, which has been in fear and extreme fear territory for months, is now in line with the September numbers.

However, for long-term bitcoin accumulators this is likely to be their best season yet. The increasingly strong connection to macroeconomic factors has provided stable (not to say sluggish) price action for the asset and given investors more opportunities for accumulation.

Samuel Edwards
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