On February 23rd, we heard billionaire investor Jeffrey Gundlach, CEO of DoubleLine Capital comment on Bitcoin being the poster child for social mood and market mood. From what he told CNBC’s Scott Wapner during a “Fast Money Halftime Report” interview, Gundlach “is actually using the sentiment regarding speculative assets like Bitcoin as a guide to maybe what the future will bring.”
Strong Positive Linear Correlation Over the Past Five Years
We did a little number crunching ourselves and figured out that Bitcoin (BTC) does sport a strong positive linear relationship with US equity (as represented by the S&P 500 index). Comparing Bitcoin (BTC) price data against the S&P 500 index level for the past five years (November 24th 2013, to February 25th 2018) we arrived at a correlation coefficient of 0.78, implying that the two variables sport a strong positive linear correlation.
Bitcoin as a Leading Indicator for the US Equity Market
We also studied the trend in the price of Bitcoin (BTC) and the S&P 500 index since the beginning of 2017. Well, indeed Bitcoin does appear to be a useful predictor for the direction of the US equity market, with the relationship becoming even more pronounced since September 2017 (as also rightly pointed out by Gundlach during his interview).
Both Bitcoin and the US equity market (S&P 500) were trending northwards up until December 18th, when Bitcoin reversed its trend (marked 1 red in the chart above). Subsequently in 2018, sometime around January 26th, we saw US equity reverse trend too (1 blue). Then again, in early February 2018, Bitcoin (2 red) began moving North again, with US equity (2 blue) following in its footsteps soon after. More recent pulls and drawbacks (3 red & blue) in these two variables also support the above trend as evidenced in the chart above; each time with the red preceding the blue; suggesting that Bitcoin is a leading indicator for US market sentiment.