Analysis of Bitcoin’s Correlation and Volatility: IntoTheBlock
CMC Research

Analysis of Bitcoin’s Correlation and Volatility: IntoTheBlock

Created 1yr ago, last updated 1yr ago

Bitcoin reached its lowest level of correlation with the Nasdaq 100 since the start of 2022, and its volatility even dipped below the equity market index. IntoTheBlock dives deeper.

Analysis of Bitcoin’s Correlation and Volatility: IntoTheBlock

The past month has been calm in terms of price movements on the cryptocurrencies markets. From the traditional markets standpoint, anticipation of economic relief, like Canada’s lower than expected interest hike and the US GDP numbers coming higher than anticipated, have propelled markets into a month high. This article aims to go over the correlation between cryptocurrencies and traditional markets, low levels of volatility in Bitcoin’s price and its differences with traditional markets.

Improved economic outlook generated a price rally in the traditional finance markets beginning on October 16. Crypto markets' lagged in following this trend in price. This came as a surprise, since the two markets had carried a high correlation since the beginning of the year.

Source: IntoTheBlock Capital Markets Insights

Correlation between the Nasdaq 100 and Bitcoin reached 0.05 — the lowest it has been since mid-January 2022. A correlation near 0 suggests no correlation between the prices being measured. This low correlation surprised many investors, since both markets had been having a similar reaction to the economic situation. This trend didn’t last long — at the time of writing, Bitcoin’s price has rallied, increasing the correlation between the two markets back to 0.67.

Despite traditional markets rallying in mid October, Bitcoin price remained stagnant, hovering in the $19,000 to $20,000 range for approximately 10 days, before following the same rally trend. This uncharacteristic stability in Bitcoin’s price has led its 30-day volatility to drop below 30% for the first time since October 2020.

Source: IntoTheBlock’s Bitcoin Analytics

Volatility is traditionally a measure used to evaluate the riskiness of investing in a particular asset. High volatility essentially means high price swings (either on the upside or downside). Low volatility, on the contrary, points to stagnating price action.

Historically in crypto markets, periods of low volatility tend to precede large spikes in volatility. This can be analyzed in the chart above for the dates of October 2020, April 2021 and May 2022, in which the Bitcoin price took sharp swings in both directions. These spikes can be in any direction, they just usually point to a trend-reversal.

Furthermore,  this recent unusual Bitcoin price stagnation has caused price volatility of the Nasdaq100 to surpass that of Bitcoin. This behavior is uncommon, since traditional market indices like the Nasdaq100, unlike Bitcoin, are characterized for their low volatility.

Source: IntoTheBlock Capital Markets Insights

The indicator above measures the rolling 30-day volatility of crypto and traditional assets over time, annualized to the number of days these assets are traded. Currently, the Nasdaq 30-day volatility is 35% while Bitcoin’s is 24%. This indicator is useful to analyze which asset’s price varies the most. As may be expected, crypto generally has higher volatility than traditional assets. However, due to current market conditions, the Nasdaq100 carries a significantly higher price volatility.

In conclusion, the correlation between Bitcoin and stock indices reached its lowest level in mid-October 2022, but has since climbed. Volatility of Bitcoin’s price is at a 2 year low, even reaching the point of being less volatile than the Nasdaq100 index. Correlation and volatility of the markets can be analyzed in many different ways; this can be useful to gain a higher understanding and knowledge of the current market situation.

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