Bitcoin's big picture: long-term correlation with gold and Nasdaq, liquidity is key driver

Compiled by Shenchao TechFlow

If you detach yourself from the daily fluctuations of major asset classes, you will find a big trend.

This trend connects Bitcoin, gold, and leading companies with significant positions in the stock market, and it is affecting everything downstream.

This is the big picture we should be focusing on.

Key Points

This week we are not looking at short-term correlations, but taking a long-term view. When we look at the big picture, what we learned:

Bitcoin’s price trend closely correlates with gold and Nasdaq over the long term, driven primarily by global liquidity conditions.

Many crypto assets, miners, and related stocks are following Bitcoin’s moves. Investing in these assets is essentially betting on the direction of Bitcoin.

Financial conditions in the United States are easing, creating a favorable environment for Bitcoin and related assets.

Current liquidity supports Bitcoin, but a potential U.S. recession remains a key risk to watch.

Understanding these long-term trends and macro correlations is critical to effectively navigating the crypto market.

Looking at Macro Correlation

Since we started this correlation report, I have generally focused on shorter timeframes. For us, "short" means monthly scale, so we typically study correlation changes within a 1-month rolling window.

This approach helps identify potential turning points, but also introduces relatively noisy (so some guesswork is required in the analysis).

Sometimes, it’s worth taking a longer view to better understand long-term trends.

About 15 years ago, when I first got into the quantitative business, information advantages could still be found in short time frames. But as time goes by, these advantages become more and more difficult to capture, and I think having a deep understanding of the big picture of long-term trading is where the real advantage lies.

So today, I decided to tweak some parameters and study the evolution of Bitcoin’s trend similarity score against several “macro” assets over a 1-year rolling window.

This approach helps ensure we don’t miss the forest for the trees and gives us a clearer overall picture.

This is the result. As a reminder, a trend similarity score close to 1 means that two assets are trending in the same direction, while a score close to -1 indicates that they are trending in opposite directions.

Is Bitcoin greatly affected by fluctuations in the strength and weakness of the US dollar (DXY)? not at all. The trend similarity score only fluctuates between positive and negative values.

Is Bitcoin related to interest rate changes? It also has little impact. The trend correlation we see is similar to that of DXY.

However, when you look at gold and the Nasdaq, you see a more consistent relationship. Especially since we got through the recent bear market, the correlation between Bitcoin, gold, and the Nasdaq is very strong.

This is no coincidence. There is a common factor linking all three: global liquidity.

Global liquidity drives these assets by affecting risk appetite and investment flows. Loose monetary policy has not only boosted risk assets such as Bitcoin and tech-heavy Nasdaq stocks, but also gold as a hedge against potential inflation. These assets tend to move in tandem as liquidity fluctuates, reflecting broader economic conditions and investor sentiment.

This has downstream effects.

Downstream Effects of Bitcoin

Here we are talking about correlation, not potential causation.

However, it is fair to say that we can divide the world into leaders and followers.

For example, Global Liquidity is the leader and Bitcoin is the follower. Or Bitcoin is the leader and MicroStrategy is the follower.

When it comes to followers of Bitcoin, we can identify several natural categories:

• Cryptoassets (e.g. Ethereum)
• Assets that derive value from Bitcoin (e.g. miners, MicroStrategy)
• Indirect Assets that profit from Bitcoin value growth (like Coinbase)

By looking at the trend similarity scores of these assets over a 1-year period, we can see some typical patterns of behavior. Let’s look at a few examples:

The rule basically goes like this: Over a long enough time frame (say a year), the trend correlation between Bitcoin and all directly or indirectly related assets is very high.

Actually, the word "very high" is not accurate enough. I should say these trends are very strongly correlated.

Betting on any of these assets is basically the same as making a directional bet on Bitcoin. Yes, some of these assets will grow faster than others. But they all flourish or decline together.

The good news is that current conditions appear to be conducive for these assets to prosper.

Liquidity Tailwinds

A few months ago, we discussed that financial conditions in the United States were at a critical juncture.

There are two possible situations:

• 如果通膨情況惡化，我們將面臨「高利率維持更久」以及更多次升息的風險。即使只是這種威脅，也會導致金融環境收緊，金融資產的流動性減少。
• 如果通膨情勢改善，聯準會可能會開始降息。這將可能導致比當時更寬鬆的金融環境。 最終，寬鬆的情景佔了上風。從國家金融狀況指數的趨勢中已經可以明顯看出這一點。

與流動性對抗是非常危險的。在2008年金融危機後，流動性成為一切的驅動力。

隨著金融環境因預期降息而變得寬鬆，比特幣（及其相關資產）將迎來順風。

唯一可能打破這種局面的因素是美國陷入經濟衰退。因此，我密切注意就業市場的變化速度。

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