The Dollar Has a New Friend

Analyzing the correlation between the U.S. dollar and bitcoin

Nov 13, 2020 at 12:21 PM
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As of this writing (Nov. 6), the only certainty wrought from the 2020 U.S. presidential election is that investors better become accustomed to more political gridlock amid a split government. Down-ticket Democrats did not fare as hoped in the Senate, so even should former Vice President Joe Biden enter the White House in January – as it appears likely – he's possibly entering with a Republican-controlled Senate and a Democrat-dominated House.

What does that mean for investors? Fiscal policy achievements may be hard to come by. Instead, look for the Federal Reserve and central banks around the world to pick up the slack – as they've done for the past four years – with quantitative easing and measures that keep financial markets stable. That's why these institutions are there in the first place. One victim of increased institutional exposure is the weight of currencies, which see their purchasing power plummet when Fed and central bank measures are implemented. With that in mind, let's take a look at the most controversial digital currency out there, bitcoin.

Regardless of opinion, bitcoin and cryptocurrency's impact on the world continues to be monumental. Not just its efficacy -- which will be debated for years – but because of its conceptual utility. It's no secret that central banks and even the International Monetary Fund (IMF) are in the slow process of developing their own private digital currencies. Twelve months ago, this news may have been met with an unenthused 'ho-hum.' But we are all enduring the ugliness of a pandemic with no end in sight, where citizens need direct government fiscal response. The ability to drop stimulus into bank accounts has become awfully appealing, given what we've gone through in 2020.

Bitcoin has other intriguing storylines as we enter 2021. Will regulations continue to be lifted? Will there still be a known familiarity with bitcoin, or in other words, will it continue to dominate the market space in casual investors' minds? Hedge funds are coming around. Paul Tudor Jones was the first well-known large hedge fund manager to enter the space back in 2017. Then, during the height of the pandemic, he added it and futures to his fund as a monetary hedge. And let's not forget, smaller shops have been able to enter a bit earlier as there are less reputational risks for them taking a gamble. On top of that, there are many crypto hedge funds that are solely dedicated to the space, although, they typically allocate to a variety of coins/tokens. Keep an eye on other hedge funds that are finally getting accustomed to the "fad," as well as those becoming more comfortable with what they know.

But of course there are still valid questions regarding bitcoin, and this is in no way an endorsement of the product. It remains, in the words of Schaeffer's Senior Market Strategist Matthew Timpane, a "quirky asset sometimes acts as a hedge and sometimes acts as a risk-on asset." Does this inconsistency change as more become familiar with it? After all, it's been more than a decade in its making, so the "newcomer" label ought to be shed soon if it wants to keep gaining traction on a global scale.

That's all speculation and conjecture for the future. In the now, there are correlations that help articulate bitcoin's role in the financial landscape. On Thursday, Nov. 15, bitcoin surged past the $15,000 level, taking part in the broad market Election week rally. This came even amid some negative publicity regarding a multi-million heist from a coin purse not used since 2015. Yet look at the chart below of bitcoin, the U.S. dollar, the S&P 500 Index (SPX), and gold. It would appear there’s a correlation between the SPX and bitcoin. But when the dollar becomes inverted, it tracks right along with the other three assets.

So does the dollar drive bitcoin? It's still too early to tell, but it does give investors something to track going forward. Gold of course will likely have its staying power as a hedge against currencies, however, they are already well represented by a significant call to put imbalance. The “less-popular” but the controversial cryptocurrency could soon be coming to the safe-haven asset's aid.


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Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, November 8.


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