Bitcoin Dominance, Nasdaq Correlation and The Bear Market

in LeoFinance2 years ago (edited)

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Many of the arguments used to market Bitcoin have become obsolete by 2022. The first of these arguments was that Bitcoin did not correlate with other markets. This feature was of value to portfolio managers because it provided genuine portfolio diversification.

Nasdaq 100 Correlation

When market players were convinced that the FED would increase interest rates in January, asset prices began to decline rapidly. Bitcoin was no exception in this regard. Bitcoin price has been correlated with stock markets in the past. However, this situation lasted for a month at most, and the Bitcoin price continued to move in line with the dynamics of the crypto market. This year, however, the correlation continued for longer.

In the chart below, the orange line shows the percent changes in the Nasdaq 100 index, and the blue line indicates the percent changes in the BTC price. The purple graph shows the correlation coefficient between the two variables. A correlation value close to 1 indicates that the relationship is strong.

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From the beginning of 2022 until June, we see a strong relationship between them. This relationship only weakened in February. As of June, we see a more fluctuating course. The correlation continues, albeit weakening somewhat. It seems that the correlation will not disappear as long as the effect of the FED on asset prices continues.

Digital Gold (Inflation Hedge)

One of the claims made by crypto influencers about Bitcoin was that Bitcoin was digital gold. This argument has also been adopted by regulatory authorities such as the SEC. Likewise, Bitcoin is considered a commodity. There is no other cryptocurrency that SEC chairman Gary Gensler has given this honor to.

Bitcoin's limited supply made it, at least potentially, a hedge against inflation. This view was widely accepted when inflation had not yet gained momentum in the autumn months. However, when the FED started to increase interest rates, we saw that this was not the case. Bitcoin has been priced in with high-risk assets like technology stocks. This situation shows that rhetoric and reality do not always coincide.

Bitcoin Domination

Another widely accepted view was that BTC dominance would increase in bear markets. This view was based on a review of past bear market data. In 2014, BTC dominance followed a volatile course. In the 2018-2019 period, Bitcoin dominance increased. At the end of each good bear season, Bitcoin's price rose first, followed by other crypto assets. So the ideal investment tool for bear seasons was Bitcoin.

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Bitcoin dominance did peak indeed from mid-January to June. In the last three months, it has regressed regularly. When we draw a trend line since May 2021, we see that Bitcoin dominance is in a decreasing trend. Could the point where the trendline break to the downside marks the end of the bear season?

On the other hand, when we look at Bitcoin dominance from a wider time window, we see that it is in a clear downward trend. Bitcoin dominance is decreasing by an average of 6% each year. Reducing Bitcoin dominance is a good thing for the crypto market. It shows that other crypto projects are progressing on the path that Bitcoin has demonstrated.

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Conclusion

What do the above discussions tell us about the route of the crypto market? Crypto influencers make predictions in line with a logic construct. In doing so, they make use of historical data. In April 2018, we saw a situation similar to the 7% decline in Bitcoin dominance. Afterward, Bitcoin dominance started rising, and the bear market continued for another year. Will history repeat itself?

The bear market of 2018-2019 was about the dynamics of crypto itself. While there was no actual use, the prices were excessively inflated, and a long time passed for the stones to settle again. Those who have lived through both periods will appreciate the difference.

Pricing in the crypto market today is related to macroeconomic developments. Even more specifically, it's about high inflation. The website Truflation, which monitors prices daily, shows that US inflation fell by 1 percent in August. If the PCI data released on September 13 confirms this decline, the FED may raise interest rates by 50 basis points this month instead of 75.

We know that the sector that creates the biggest problem in inflation is energy. Brent oil price is continuously downtrend after hitting $122 in January. After the oil price overcame the $92 resistance level, selling accelerated, and the price dropped to the $87 level. On the natural gas side, inflation has exceeded 200% in Europe. Therefore, the 20% decline in the last week does not mean anything.

In summary, I believe it isn't easy to form a clear view of the direction of the markets at the moment. I approach the crypto market with cautious optimism.

Thank you for reading.

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Well written article...

I still believe Bitcoinis GOld 2.0... still(: ... I never have the heart to sell all my BTCs although I did some because I needed money...

I feel BTC is necessary for wealth preservation...

People don't feel that USD will collapse, so they are not shifting to BTC... they would have if FED pivoted I think... but now USD dollar is strong na... so why will they shift...

Yes, year by year BTC is losing dominance, crypto market is very mature now... you should have included Ethereum in the article, is ETH beating BTC in price performence... and is it the king and leader of Alt coins?

Btc increased %8 today like good old days :)

Well... its volatile... we have to see if it falls below this 20,000$ level...lot of macro economic headwinds to tumple prices of all asset markets and remember this is BTC's first experience of a proper recession market...so it will bahave differently than what we expect.

If it were not for recession, BTC's lows would have been somewhere reached by now and 30,000$ ...it would have found support... but since its recession, its bearish for all assets...

we will get to see if BTC's gold 2.0 perspective plays out... as well