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Bitcoin and the Dow meet in middle and close in on $30K

Following the latest stock market plunge Wednesday, with stocks closing down close to 4%, the Dow Jones is trading at 31,500. In what would have seemed improbable not too long ago, the index is now staring down the barrel at the psychologically important 30,000 level.

Curiously, Bitcoin is doing the same – trading close to $30,000, currently at $29,000 after a 25% plunge last week. The implosion of Terra’s $18 billion stablecoin, UST, and the accompanying native token Luna, which was once worth $42 billion, sparked contagion in the crypto markets. Not helping Bitcoin’s cause was the Luna Foundation Guard (LFG) flooding the market with sell orders of 80,000 bitcoins in a futile attempt the defend the UST peg. These events pulled Bitcoin down from close to $40,000 to where it now sits.


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For the purposes of this article, I’m going to use a little poetic license and refer to the Dow points as “dollars”, and have a look at which hits $30,000 first – Bitcoin or the Dow. I know, it’s not super scientific, but what are you gonna do?

Sentiment

Sentiment has not been this bearish in a long time, as seemingly every variable is working against investors. We have rampant inflation (I wish I had a bitcoin for every time I’ve typed that phrase over the last month), a hawkish Fed, and a tenuous geopolitical situation. I’m seeing these being described as macro headwinds, but they feel more like macro hurricanes to me. It’s ugly out there.

So, while the Dow and Bitcoin have both careened towards $30,000 off the back of this recent risk-off environment, if we zoom out the duo have taken very different paths to the price mark. Looking at returns since just before the onset of COVID-20 (Jan-20, otherwise known as a lifetime ago), the difference in volatility is stark – hit “Play Timeline” in the top left of the graph to see this visually.

Volatility

Dow peaked in the high $36,000s in January 2022, whereas Bitcoin did its best Icarus impression in November-21, up at $68,700 before its wings melted. To quantify the difference in volatility in numerical terms (for you maths nerds out there), the standard deviation of daily returns for the Dow since Jan-20 has been 1.7%, but nearly three times bigger at 4.7% for Bitcoin.

This means that two-thirds of daily moves have been less than +/- 1.7% for the Dow, but less than +/- 4.7% for Bitcoin. Despite this chasm in volatility, the direction of the daily price moves has been very correlated, with a correlation coefficient of 0.88 (for the uninitiated, a score of 1 is a perfect correlation. For example, the correlation between the CPI number rising and politicians mentioning the word “transient” is 1).

Therefore, a correlation of 0.88 shows any decoupling argument for Bitcoin is still a long way off – right now it continues to follow the movements of the wider market. Meanwhile, last week marked the fourth time since the start of 2020 that the price of Bitcoin and the Dow has been equal. The first came around Chirstmas 2020 when Bitcoin was in the midst of a parabolic move upwards to the mid $60K’s. The second was in June 2021 as Bitcoin fell down, although the return journey was less than a month later as they crossed once more as Bitcoin again rocketed upwards to the $60K’s. Those days seem a long time ago.

Who hits $30K First?

To hit $30,000, the Dow needs to fall 4.5%, whereas Bitcoin needs to jump 2.4%. Looking at the returns over the last two years, a 4.5% drop in the Dow has occurred seven times. Six of these were in the chaotic month of March 2020, when the markets were trying to figure out what exactly this strange virus called COVID-19 meant for the world. The only other time a drop this large a drop occurred was the 6.9% plunge on June 11th 2020, when a Fed announcement confirming there would be no more rate cuts took the market by surprise.

Bitcoin, on the other hand, has jumped 2.4% no less than 161 times in the same time period. So if you put a gun to my head and ask me which kisses $30,000 first, I’m taking Bitcoin without hesitation. Not only is it a smaller jump in percentage terms, at +2.4% compared to -4.5%, but Bitcoin is by far the more volatile asset, as discussed above.

Unless…

Unless, that is, you have become so pessimistic on the state of the market that even a 2.4% jump for Bitcoin seems unrealistic. As I write this, the Dow has closed down 3.6% and I’m struggling to remember the last time I saw a green number on my screen.

But in all seriousness, while the (short-term) bet here is obviously Bitcoin, regardless of what you think of the market, the very premise of this article highlights how far we have fallen from only the start of the year. Bitcoin was trading at $46,000 and the Dow at $36,000 as we entered 2022, and now we are assessing both at the $30,000 benchmark.

With the S&P 500 closing down 4% today, for its worst day since June 2020, let’s just hope I’m not writing this same article next month, asking whether the S&P or Bitcoin touch $3,000 first.  Either way, I’ll revisit the analysis with a part 2 next month. Hey, maybe S&P 500 beats both Bitcoin and the Dow to $30,000? You heard it here first (that’s a joke, just to confirm – assets can only go down in price, I’ve recently realised)

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