Last month we noted the surprising correlation between USD and BTC. From May 1 through June 20, the two currencies shared a 0.76 correlation, which actually increased to 0.89 when comparing bitcoin with three-day-old USD levels. Since then, markets have reacted to a series of macroeconomic events that not only broke that correlation, but actually reversed it, such that BTC has been inversely tracing USD with remarkable accuracy ever since.
In a press conference on June 19, Ben Bernanke said the Fed may begin tapering its asset purchases as early as later this year and that the program may end altogether in mid-2014, potentially marking the beginning of the end of the multi-year balance sheet expansion of the central bank. Following the press conference, US markets suffered their worst four-day losses in 2013. The S&P fell 6.2% and treasury yields rose more than 40%, while the USD rose steadily over the next three weeks, gaining more than 4%.
This news and the associated drastic market movements broke the strong correlation mentioned above, as an important driver of inflation concerns around USD showed signs of coming to an end. Bitcoin, seen by many as an alternative to the regularly-debased fiat currencies issued by governments, would theoretically see lower demand in a world where the Fed is no longer monetizing $85 billion of debt per month. This may explain the remarkable -0.88 BTC / USD correlation that began at the same time.
Reinforcing this potential causation behind the correlation is the dramatic uptick in BTC starting on July 10 when Bernanke stated that “highly accommodative monetary policy for the foreseeable future is what’s needed” – the same day USD began heavily paring gains made after his comments on June 19. Similarly, BTC began more closely tracking gold over the period, though this is to be expected, given the historically inverse correlation gold has with USD.
Not to be overlooked is the news on June 20 that Mt. Gox, the largest bitcoin exchange by volume, was suspending USD withdrawals. Coinciding closely with Bernanke’s initial taper messaging, this may also have had a profound effect on market confidence, driving BTC rates down. That said, smart traders with capital stuck on Gox would have actually been buying BTC to avoid the fiat withdrawal restrictions, and there is little justification around the Gox situation that would drive the more recent sudden uptick in BTC.
Bernanke gives his semi-annual testimony on US economic and monetary policy today. Whatever effect his testimony has, we’ll be watching to see if the strong correlations that have been building hold over the coming weeks, as it may be the beginning of a trend towards bitcoin finding its place as an alternative asset in the global economy.