Here’s why Bitcoin traders shouldn’t overanalyze US inflation data

When important economic figures are released, analysts and pundits will try to explain intraday price action. This practice is quite common in the crypto sector.

The February 10th report by the United States Bureau of Labor Statistics showed a 7.5% increase of the Consumer Price Index (CPI). Traders rushed to make connections to the crypto price action. Historical correlation data suggests that investors need to carefully examine whether there is any relationship between Bitcoin (BTC), and major economic indicators.

A general investment advice would recommend that traders ignore intraday movements, particularly considering that many assets don’t trade on a 24-hour basis.

Further, Bitcoin’s order books are smaller than those of WTI, gold and S&P 500 futures. If one adds stablecoin trading to the equation, Bitcoin’s average 7-day volume is $7Billion, while the three largest S&P 500 exchange traded funds manage $54B.

A large order flow from one entity could easily cause a disruption in the cryptocurrency market, but the effect on WTI oil and the S&P 500 tends to be less.

Does Bitcoin price anticipate inflation data?

After the 7.5% rise in the U.S. consumer prices index on February 10, the Bitcoin price fell to $43,200. CNBC reporters were able to correlate these two events.

Bitcoin dips slightly as 10-year Treasury yield tops 2% on hotter-than-expected inflation report
CNBC (@CNBC), February 10, 2022

Although the statement accurately reflected market conditions at the time, one should analyze economic data over a longer period of time. It is possible that Bitcoin does not have a relevant price correlation. This hypothesis also requires testing.

Comparing the long-term charts of Bitcoin price and U.S. inflation gives false impressions of correlation and causation. This is especially true when using logarithmic chart.

U.S. CPI (orange, left) vs. Bitcoin/USD (blue, right). TradingView

Bitcoin actually has predicted the economic data by three months. It rose above $11,000 in September 2020 while inflation data stagnated at 1.5%. This was more recent than May 2021.

The Bitcoin price then “cooled off”, failing to break the $60,000 level support, while sharp increases in CPI were halted in July at 5.4%.

For those who rely on mathematical formulas, over the past twelve months, the correlation coefficient between Bitcoin prices and U.S. inflation oscillated between negative 0.94 and positive 0.95. From a statistical perspective, it makes no sense to associate one with another.

Similar: Analysts believe that Bitcoin’s range-bound trading at key support levels reflects a trend reverse

Are traditional markets actually showing a correlation with Bitcoin?

Another mistake is to attribute the performance of Bitcoin to the correlation of assets. While it is possible to have a few months with 0.65 (positive) or negative correlations over a long period of time, data shows otherwise.

Charts of 30-day Correlations for Bitcoin, S&P500 and WTI Oil. TradingView

The average correlation between the S&P 500 and BTC was 0.65 between August 2021 and September 2021. This is however cherry-picking data as a longer timeframe does not reveal any such evidence.

There was no price relationship between Bitcoin and major assets like the WTI oil price or the iShares TIPS bond ETF which tracks an inflation-protected U.S Treasury bonds.

Many data points indicate that investors should not ignore intraday price movements after economic data has been released. Sometimes, the data can give investors a false impression of correlation and causation.

While inflation and other data can influence pricing in the short-term, they do not affect the trend. It is clear that Bitcoin is an entirely different market than traditional markets.

Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.