Recent market analysis shows that Bitcoin and the U.S. inflation-adjusted bond yield are dancing to different tunes, evidencing the strongest negative correlation we’ve witnessed in four months. Brought into perspective, this dramatic shift in correlation plummeted in September from +0.28 to a stark -0.72, a trend last observed in April. This surprising dynamic suggests that the echo of traditional finance and macro influences on Bitcoin‘s price movement is audible once more.
This negative correlation began to crumble in July on account of optimism surrounding the possible authorization of a spot ETF. Treasury inflation-indexed securities (commonly pinned to inflation, the non-seasonally adjusted U.S. city average of all items consumer price index for all urban consumers) offer revealing insight into this trend. These securities stand proud as an economic barometer, the yield on these often termed as real or inflation-adjusted yield.
Understanding these dynamics further, when real yields linger in the negative, users feel enticed towards high-risk alternatives such as technology stocks and cryptocurrencies. We caught a glimpse of this behaviour following the notorious coronavirus-spurred crash in March last year. Contrarily, when real yields resonate positive and incline, investors generally feel safer parking their funds in fixed-income securities.
The annals of market history from September proclaim the incredibly robust 30-day negative correlation that was witnessed between Bitcoin and the real yield, the strongest since April. Last week, the yield on the 10-year U.S. inflation-indexed security sprinted to 1.97%, the highest since the chilly months of February 2009.
At the same time, Bitcoin, the current market leader by value, tumbled over 10%, marking its most severe weekly decline since the early days of November. Gold, which is widely considered to have an inverse relationship with real yields, stumbled by more than 1%, its fourth consecutive weekly drop. Meanwhile, the Nasdaq fell 2.22%.
In sum, enduring the brunt of this financial tempest have been risk assets in general. Real yields are becoming increasingly hard-headed, energy prices on the rise, doubts cast on China’s economic robustness, and the persistent commitment of major central banks to uphold loan prices higher. Simultaneously, it seems that the world of Bitcoin and related cryptocurrencies remains at the mercy of these larger economic forces.