TFA's author really needs to state what correlation coefficient [1] they're using if they're going to throw out numbers. Primary research like this, apparently done without a solid knowledge of statistics, always sets off my alarm bells.
> The predictive nature of USD for bitcoin may surprise some, but the underlying fundamentals of their high correlation may make sense, at least for the time being. Historically, the US dollar has served as a risk-averse asset, gaining value as traders pull out of other financial products during periods of uncertainty and doubt. Bitcoin seems to be following the same path.
A far more likely hypothesis is that the vast majority of bitcoin users simply want a proxy for USD for doing business on e.g. the silk road.
This analysis is interesting, however I have to comments on the methodology:
* Same measure
Comparing USD/INDEX with BIT/USD is a little bit like comparing apples and oranges, as the underlying measure for each of the time-series is different.
Multiplying BIT/USD with USD/INDEX gives us a time-series that is BIT/INDEX. Subsequently USD/INDEX can be compared with the new BIT/INDEX to get the correlation between USD and BIT with the INDEX basket as a measure.
* Correlation is only relevant for non-integrated series
It's well known that correlation for any unrelated random walks can easily be very high (positive or negative) in a spurious and random manner. The solution here might be to take the take first-difference (geometrical) of both series (de-integrating) and then check the resulting differences for correlations.
This is noise. If you start looking around for arbitrary financial timeseries that track one another over a short period, you will find spurious correlations. I especially appreciate the author's thesis about the cause:
Historically, the US dollar has served as a risk-averse asset, gaining value as traders pull out of other financial products during periods of uncertainty and doubt. Bitcoin seems to be following the same path.
Yes, bitcoin is definitely right up there behind USD as a low risk asset. Uh huh.
It's not a low risk asset. It's an alternative asset that for the last few months has been used in risk-off periods. There's a difference. Judging by the last sentence of the article, I don't think he expects it to continue trading like that.
Bitcoin is an extremely highly volatile 'asset' with nothing backing its value except optimism.
I can only guess that at this point whenever the market sees it increasing against the dollar the majority of the market immediately takes profit by transitioning to USD. Perhaps also most accepters of bitcoin use it as a USD proxy, so the price of say socks on whateveracceptsbitcoin.com isnt .05 bitcoins, but is whatever number of bitcoins equals $2.00 USD, and the bitcoins are immediately converted to dollars after the transaction is complete.
I think those ideas may explain what keeps bitcoin from exploding above its current correlation to USD, what keeps it from radically dipping, I have no clue.
Agreed... I don't really understand why it moves opposite of gold either. Does that mean that bitcoin is considered a high risk asset instead of a safety asset?
Bitcoin has been at a few 'long term plateaus' right now it's at $100, before it was stuck at $10 for awhile and $5 before that. So yea, in plateau mode, following the dollar makes sense. No doubt though it will jump again.
I'm not sure if this data can withstand scrutiny just yet but I do think it might be an interesting hypothesis because aren't all currencies and markets are intrinsically linked?
Also, because of that wouldn't it be reasonable to say that all currencies are therefore linked to the current price of oil due to the petrodollar controlling most payments for oil, and in turn all currencies would possibly follow the same price curves? I'd be interested to see a third data point, the price of oil, on the chart.
[+] [-] AnIrishDuck|12 years ago|reply
> The predictive nature of USD for bitcoin may surprise some, but the underlying fundamentals of their high correlation may make sense, at least for the time being. Historically, the US dollar has served as a risk-averse asset, gaining value as traders pull out of other financial products during periods of uncertainty and doubt. Bitcoin seems to be following the same path.
A far more likely hypothesis is that the vast majority of bitcoin users simply want a proxy for USD for doing business on e.g. the silk road.
1. http://en.wikipedia.org/wiki/Correlation_and_dependence
[+] [-] datamonger|12 years ago|reply
Also, Silk Road has become a small part of bitcoin transactions.
[+] [-] zjonsson|12 years ago|reply
* Same measure
Comparing USD/INDEX with BIT/USD is a little bit like comparing apples and oranges, as the underlying measure for each of the time-series is different.
Multiplying BIT/USD with USD/INDEX gives us a time-series that is BIT/INDEX. Subsequently USD/INDEX can be compared with the new BIT/INDEX to get the correlation between USD and BIT with the INDEX basket as a measure.
* Correlation is only relevant for non-integrated series
It's well known that correlation for any unrelated random walks can easily be very high (positive or negative) in a spurious and random manner. The solution here might be to take the take first-difference (geometrical) of both series (de-integrating) and then check the resulting differences for correlations.
[+] [-] kbenson|12 years ago|reply
Isn't that just the derivative, in Calculus?
[+] [-] minimax|12 years ago|reply
Historically, the US dollar has served as a risk-averse asset, gaining value as traders pull out of other financial products during periods of uncertainty and doubt. Bitcoin seems to be following the same path.
Yes, bitcoin is definitely right up there behind USD as a low risk asset. Uh huh.
[+] [-] CrunchyJams|12 years ago|reply
[+] [-] CrunchyJams|12 years ago|reply
[+] [-] apalmer|12 years ago|reply
I can only guess that at this point whenever the market sees it increasing against the dollar the majority of the market immediately takes profit by transitioning to USD. Perhaps also most accepters of bitcoin use it as a USD proxy, so the price of say socks on whateveracceptsbitcoin.com isnt .05 bitcoins, but is whatever number of bitcoins equals $2.00 USD, and the bitcoins are immediately converted to dollars after the transaction is complete.
I think those ideas may explain what keeps bitcoin from exploding above its current correlation to USD, what keeps it from radically dipping, I have no clue.
[+] [-] cgi_man|12 years ago|reply
[+] [-] pixie_|12 years ago|reply
[+] [-] ianstallings|12 years ago|reply
Also, because of that wouldn't it be reasonable to say that all currencies are therefore linked to the current price of oil due to the petrodollar controlling most payments for oil, and in turn all currencies would possibly follow the same price curves? I'd be interested to see a third data point, the price of oil, on the chart.