May 19, 2022: Fed Up 🍔🆙
BTC/TradFi Correlation + the SEC gets reined in
It’s frustrating to watch the correlation between cryptocurrency and TradFi.
We’re trying to build a completely independent financial system. Why should we be weighed down by the anchor that is the system we’re looking to escape? Shouldn’t BTC move independent from TradFi markets?
I prepared a Jupyter Notebook for armchair analysts to explore this point. The notebook simply reads FRED data for a number of datasets, converts to daily % change, and calculates the correlation. For a quick sanity check, here’s the correlation table for the Dow Jones Industrial Average for the past 5 years.
So it’s exactly what you hope to see — the S&P 500 has a 97% correlation with the DJIA. That’s about exactly what you’d expect. Here’s what this looks like visually.
So what about our BTC prices? Over the past five years, just about 23% correlation with the NASDAQ.
Feels a bit tough to believe, right? It seems like they’re always running together in lockstep. But data are data.
Except, what if we zoom into the one year window.
Whoa. Over the past year, BTC daily movements are now 40% correlated with the NASDAQ, a sharp increase from 20% over the past five years. Seems as though as cryptocurrency has increased in size, it’s starting to fall in line with the broader market.
Then again, I’m not much of a macro chad, so I’m looking forward to bigger brains telling me what it all means. As a casual observer watching the Fed, my interpretation is that the Fed as policy is deliberately trying to siphon money out of the economy and crash asset prices to tackle inflation.
Directionally, this roughly feels like a good idea. The US economy was pretty obviously broken, so maybe it’s a good idea to swallow the short term pain and try to fix things up long term?
Morally, my gut says that stopping inflation (which hurts the poors a lot) is probably better than propping up the asset prices (which helps rich people a lot). Whether or not it’s not working as intended is a different story, but it’s at least a solid B- for effort.
What’s eye-opening as a casual observer is just how ridiculously overpowered the Fed really is to shape the direction of the market. My conscience tells me in an ideal world the markets should be nominally fair and free of manipulation. In practice, it seems like this small council has its thumb on the scale of the entirety of the US stock market, which it can make go up or down at a whim.
And if they have disproportionate control of the US stock market, this essentially gives them heavy control over the entire global economy per this poll.
