Why should digital currency traders not be interested in changes in inflation in the United States?



Many analysts believe that the record high inflation in the United States is accelerating the digital currency market and there is even a strong correlation between the performance of bitcoin and other financial markets. However, a comparison of the available data shows the opposite of this theory and violates any long-term correlation.

According to Kevin Telegraph, every time important economic statistics are published, market analysts and experts try to connect them in some way with the presentation of prices in the financial markets, which is of course common in the digital currency market.

Traders quickly found a significant correlation between these data and the price of digital currencies, after the US Bureau of Labor Statistics reported a 7.5% increase in the Consumer Expenditure Index (CPI) on February 10. However, the ratio of different indicators in recent years shows that investors need to carefully study the relationship between bitcoin and key economic indicators.

Given that most assets are not traded 24 hours a day, experts usually advise traders to ignore daily fluctuations in their investments.

Most importantly, the bitcoin order book on various exchanges has a smaller volume than gold, the WTI oil index and the S & P500 index. Even if we consider stable coin transactions, the 7-day average value of bitcoin transactions is $ 7 billion, compared to about $ 54 billion for the S&P 500’s three largest funds.

In short, capital flows from large corporate orders can easily affect the digital currency market in the short term, but the impact of this amount of money on oil, S & P500 and gold indices is less.

Is it possible to predict inflation with the price of bitcoin?

Bitcoin fell to $ 43,200 after the news of a 7.5% increase in the US consumer spending index, one of the main tools for measuring inflation in the United States; An incident that led CNBC experts to link the two events.

Cyanobci correctly assessed market conditions at the time, but it is better to use a longer period of time to analyze economic data. In addition, bitcoin is unlikely to have a price correlation associated with this index, and such a hypothesis should certainly be tested.

A long-term comparison of bitcoin prices and inflation in the United States gives a misconception about correlation and correlation, especially when using logarithmic charts.

Comparison chart of bitcoin trends and consumer price index in the USA - in a three-month period
A chart comparing bitcoin prices and the US consumer spending index

In any case, Bitcoin forecast this economic data about three months earlier. Bitcoin rose above $ 11,000 in September 2020, while inflation remained below 1.5 percent and later rose in May 2021.

Then the growth of bitcoin stopped and failed to overcome the resistance level of $ 60,000, while the growing trend of the consumer spending index, two months later in July (July) stopped at 5.4 percent.

For those who rely on mathematical formulas, the correlation coefficient between the price of bitcoin and inflation in the United States has fluctuated between a positive 95% and a negative 94% in the last 12 months. Therefore, from a statistical point of view, their connection does not seem very logical.

Is bitcoin really connected to other financial markets?

Another common misconception among digital currency traders is that bitcoin is linked to other assets. The correlation of these indicators may have been 65% (positive or negative) over a period of one year over several months, but different data for different time intervals show otherwise.

Comparative correlation diagram between S & P500 indices, oil and inflation-resistant bitcoin ETFs
Comparison of the correlation between the S & P500 indices, oil and investment funds without inflation with bitcoin

For example, between August and September (September to September) 2021, the S & P500 correlated with bitcoin by an average of 65%. However, talking about this data is a kind of aggregation of information; Because longer periods of time show no evidence of correlation.

To date, no price link has been found between bitcoin and other large assets such as oil and inflation-free iShares ETF bonds. These assets follow an index consisting of anti-inflation bonds of the US Treasury Department.

Various data suggest that investors should ignore daily price movements after the publication of economic data, as sometimes the data creates a false picture between the correlation and the causal relationship.

Although inflation or other data influences the short-term price trend, they do not necessarily affect the main trend. Comparing the correlation chart of bitcoin with traditional markets leaves no doubt that bitcoin is a specific asset and follows the example.

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