Bitcoin (BTC), US Stock Markets, and Coronavirus (COVID-19)
Within the last week, Bitcoin and US stock markets have crashed amid the Novel Coronavirus (COVID-19) pandemic. Bitcoin crashed the day after the World Health Organization (WHO) declared COVID-19 outbreak as a pandemic. The Dow Jones Industrial Index (DJI) and the S&P 500 each started crashing mid-way through February 2020 but also responded negatively to the WHO's announcement. The DJI and S&P 500 each opened the following day with a loss of about 26% -- one of the biggest losses since 1987's Black Monday. Additionally, the US government is looking at a stimulus package of $1 trillion with $500 billion in checks to Americans. As the largest uptrend in the US economy's history comes to an end, the recession is around the corner, if not already here. In this article, I look examine the relationships between Bitcoin, the US stock market, and COVID-19.
Trump printing money for COVID-19 meme.
Bitcoin (BTC), the hardest most scarce money on the planet, is making a nice recovery amid the government’s fiasco and the COVID-19 pandemic. This all makes perfect sense. The current times are reminiscent of the 2008/2009 recession. Government's ordered the printing presses be broken out and turned on full blast. This is when Satoshi Nakamoto released Bitcoin with a message to the world citing the Times newspaper, "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks." And now the US is seeing the same thing happen again right before their very eyes.
The genesis block's message.
Bitcoin has made a ~58% increase from the low ($3,935.90) of March, Friday the 13th, 2020. It can be speculated that the bounce is explained by the Bitcoiners rushing in to buy Bitcoin at discounted prices. Bitcoiners know that when there's blood in the streets, it's time to buy. This is especially as the dollar is being inflated in response to the economic downturn.
Bitcoin bounces to the upside.
I am unable now to calculate a correlation between Bitcoin and the stimulus packages announce by the US government due to a lack of data. However, as a proxy, I used the Dow Jones Industrial index and the S&P 500, given that they seem to be responding to the government’s recent announcements.
Daily close of Bitcoin, S&P 500, and DJI.
As you may have seen before in my previous articles, I have plotted the daily close of Bitcoin, S&P 500 and the DJI and calculated the daily percent change. In the analysis, I used the daily percent change for the correlation as it is a more accurate measure for change (it standardizes change and eliminates extreme values). The results suggest that Bitcoin and the DJI and S&P 500 are each significantly correlated with a positive relationship, r(38) = .666, p < .01 and r(38) = .674, p < .01, respectively. Correlations between .6 and .7 are generally considered to be moderate in strength. This suggests that as one goes up the other goes up with it (it can also be inferred that if one goes down the other one will also go down). My interpretation is that as the US government pumps money into the economy (inflating the dollar) in the hopes of "stimulating" it, Bitcoin is rising in tangent with the "stimulated" US markets. In other words, as supply of dollars increases, Bitcoin increases. Another correlation that might capture this relationship is inflation rate per day versus Bitcoin closing price. Anyway, that's for a different time. Presently, this interpretation falls in line with the idea discussed above: Bitcoiners are buying up Bitcoin because they know that if they don't buy Bitcoin, then their dollars will depreciate due to inflation. Bitcoiners would rather just buy Bitcoin rather than hold dollars over the long term, especially given the current events. However, the analysis done here only explains about 55% of the relationship, leaving 45% of this relationship unexplained.
You might have noticed that COVID-19 is included in this analysis too. I will get to that later. First, I wanted to highlight some market sentiment and show the daily chart.
Daily chart with Fibonacci retracements, three moving averages, and a Bollinger Band.
After riding the lower Bollinger Band (BB) down, Bitcoin found support at the 78.6% Fibonacci level. However, there is currently no other support available in this area. The moving averages are all at or above the 61.8% Fibonacci line at $7,236.13. Bitcoin could ride up towards that level, but it would be facing resistance at that point. Prices will likely retest the $5,438.43 area until Bitcoin can find more support. However, this is not all to bad for Bitcoin. In fact, some consider this an opportunity to be buying. I searched "buy bitcoin" on Twitter and picked the first three relevant tweets. See below.
As you can see, participants of the Bitcoin market are expressing a positive sentiment about Bitcoin's current prices. Some of them even directly cite the government’s decision to print more money as the reason why to buy Bitcoin. Times are crazy right now with the COVID-19 pandemic.
Here is the correlation matrix again. As you may notice, there are no asterisks next to any of the correlations with COVID-19. This suggests that daily new confirmed cases of COVID-19 are not significantly correlated to the daily closing price of Bitcoin, the DJI, or the S&P 500, r(56) = .043, p = .750; r(38) = .079, p = .628; r(38) = .084, p = .605, respectively. They have a correlation coefficient of less than .01 -- a very weak relationship. Daily new confirmed COVID-19 cases alone is not enough to explain its relationships between Bitcoin and the stock market. This suggests there are other variables that could better explain these relationships.
Given there was no significant correlation with daily percent change of new COVID-19 cases and Bitcoin, the Dow Jones Industrial index (DJI),and the S&P 500, it appears that WHO's announcement of COVID-19 as a pandemic affected people's psychology, and thus affected the markets (including Bitcoin and the US stock market). In regard to the relationship between Bitcoin, DJI, and the S&P 500, although their relationships were significant, a large portion (45%) of that relationship is unexplained. More research can be done as to what other variables are also correlated with Bitcoin, the US stock market, and COVID-19. Once more variables are identified, further analysis can be done while controlling for those identified variables. A couple variables that might be of interest include, daily number of tweets citing Bitcoin, Coronavirus (COVID-19), and/or the US stock market.
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