Bitcoin shows hint of correlation with major financial markets

In Insights

As we get into 2019 and thinking about the prospects of Bitcoin this year, I would like to look at the possible relationship between the cryptocurrency market and other financial markets.

There are currently 2,083 cryptocurrencies in the market. But when we take a closer look at their market size, most are relatively small. In fact, Bitcoin continues to occupy more than half of the total cryptocurrency market cap.

Bitcoin remains the single most influential cryptocurrency, but there has been a shift.

Although Bitcoin was rarely perceived as a financial asset in the past and price movements tended to be independent of traditional financial markets, the BTC price seems is gradually becoming more influenced by other markets, such as the stock and foreign exchange markets.

Movements in the markets

According to CoinMarketCap, the price of Bitcoin was USD13,901 on January 1, 2018. At the end of the month a hacking incident occurred at a Japanese cryptocurrency exchange and the BTC price started to decrease.

In September 2018, a hacking incident occurred again at another Japanese cryptocurrency exchange, and even if not directly related to the hacking, the price of BTC fell to around USD3,200 by December, ending the year at about USD3,796.

Let's look at how the BTC price shifted around the middle of November last year in the midst of the cryptocurrency market's significant fall.

According to CoinMarketCap, the BTC price had been trading in the USD6,300 to USD6,400 range from November 13 to 14 against the background of the expected Bitcoin Cash hard fork.

On the day of the fork, November 15, the BTC price began to decline dramatically and temporarily fell to USD5,500, before sliding all the way down to USD3,700.

Meanwhile, according to TradingView, Nikkei 225 dropped from JPY24,604 yen on October 1 to JPY20,885 on October 26, but bottomed out and fluctuated mainly in the range of JPY21,700 to JPY21,900 yen October 13 to 16, which is the period before and after the Bitcoin Cash hard fork.

At this point there was seemingly no direct relationship between BTC and Nikkei 225, but the impact of the Bitcoin Cash hard fork should not be underplayed.

Weak signs of correlation

On November 19, Nikkei 225 began to decline sharply and dropped to nearly JPY21,200 on November 20. The price of Bitcoin also decreased from USD5,600 on November 19 to USD4,464 on November 20, so unlike the period around November 15, the price of Nikkei 225 and Bitcoin moved in the same direction.

After November 20, Nikkei 225 bottomed out and surged to JPY22,796 on December 2 while the BTC price gradually decreased.

BTC price seems to move closer and perhaps a little behind changes in the foreign exchange rate where Japanese Yen depreciated to JPY114 per US dollar on November 12 and then appreciated to JPY112 per US dollar towards November 19.

More recently, Japanese Yen further appreciated to JPY104 against the US dollar while the Japanese stock markets experienced a large decline from the beginning of January.

In March we expect the UK's Brexit from the EU, while in May the enactment of a new emperor's era is expected in Japan. Consumption tax is expected to be raised in Japan in October and we may see a prolonged US-Chinese trade throughout the year. This could lead to an economic downturn.

But the fact that the price of BTC price shows a hint of correlation to price changes in other financial assets and markets, such as stocks and currencies, is perhaps a sign that cryptocurrencies are gradually becoming recognized as financial assets.

Thee trend of BTC and other cryptocurrencies becoming increasingly analogous to a financial asset should continue in 2019, bringing yet more visibility.

The true value of cryptocurrencies will be tested in 2019.

Feel free to email cryptoresearch@quoine.com for any questions, comments or suggestions about this report.

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