Analysis: The relationship between bitcoin price volatility and the US dollar index
[Abstract] The US dollar is the most important and stable legal currency in the real world. The change of the US dollar index may have an impact on the price fluctuation of Bitcoin. Against the background of Bitcoin becoming an increasingly dollar asset, this study shows that bitcoin price volatility has a moderately negative correlation with the US dollar index.
[Key words] Bitcoin price, US dollar index, negative correlation
We know that there is a clear negative correlation between gold and the US dollar index. The reason is that gold has always been denominated in US dollars. Gold is an alternative investment tool for US dollar assets. When the US dollar is strong, the chances of profiting from the appreciation of the US dollar will increase, and investors will naturally chase the US dollar. On the contrary, when the US dollar is weak. Investors will tend to invest in gold, and gold prices are strong. Bitcoin is known as "digital gold", and what is the connection with the US dollar index? This issue deserves close attention from Bitcoin investors.
It is generally believed that the intrinsic value of Bitcoin lies in the use of Bitcoin as a medium of exchange. The dominant demand of Bitcoin is that people use it as a medium of exchange, and as its scope as an exchange medium expands and expectations increase, people's demand for Bitcoin It will also grow. At the same time, as the most important digital currency, people are optimistic about the wide application prospects of encrypted digital currency in the future. Therefore, holding some bitcoin in asset allocation has become an important choice for some investors. However, the current price fluctuations of Bitcoin are fierce, and the three derivative needs of investment, speculation and hedging have profoundly affected the price trend of Bitcoin: First, the supply of Bitcoin is constant at 21 million, so deflation will inevitably occur. In order to generate long-term investment demand; second, due to the volatility of bitcoin prices, the prevalence of spreads, leveraged transactions, contract transactions, etc., short-term speculative demand is also very strong; third, due to statutory currency appreciation or depreciation expectations, exchange rate fluctuations, etc. , causing people to partially sell the French currency - buy bitcoin, or sell bitcoin - buy the safe haven demand for the French currency, which is similar to gold demand and price fluctuations. Bitcoin is called "digital gold". reason.
The US dollar is the most important and stable legal currency in the real world. The change of the US dollar index reflects the strength or weakness of the US dollar. It may form a pumping or releasing of the bitcoin market, which will affect the price fluctuation of Bitcoin. This article attempts to Explore the link between bitcoin price volatility and the US dollar index.
I. Problem export and research path
Bitcoin experienced a magnificent roller coaster market from the end of 2017 to the third quarter of 2018. On December 17, 2017, Bitcoin hit $19,875.The historical high point, after which it began to rebound after five consecutive days of decline, rebounded to a stage high of $17,457 on January 6, 2018. After 2018, bitcoin prices fluctuated drastically, and the overall trend continued to decline. It hit a low of $5,766 during the year on June 25. Since then, it has risen and fallen. As of September 28, it was reported at $6621. At the same time, the US dollar index also fluctuated greatly in 2018, gradually falling from 95.148 points on November 7, 2017 to 88.24 points on February 15, 2018. Since then, the low position has been sideways for a while, and on April 17 from 89.125 points. It rebounded to 96.984 on August 15 and then went down. It hit a low of 93.793 on September 20 and rebounded. It closed at 95.141 on September 28, hit a high of 96.155 on October 9, and closed on October 14. At 95.241 points, it is expected to consolidate at 95 points in the future.
The upward movement of the US dollar index reflects the strength of the US dollar, and the downside reflects weaker. When the dollar strengthens, people tend to hold dollars and sell assets and investment products. When the dollar weakens, they tend to buy assets and investment products. Of course, nothing is absolute, and the association between the two can sometimes be observed. If Bitcoin is seen as an investment that meets safe-haven demand, in theory, the US dollar index is rising and bitcoin prices are falling.
Therefore, the hypothesis studied in this paper is that the dollar index has fallen and bitcoin prices have risen (or the dollar index has risen and bitcoin prices have fallen).
To demonstrate this hypothesis, the author intercepted bitcoin price data and US dollar index data from January 1 to September 28, 2018 for statistical analysis. In addition, since the US dollar index did not trade on Saturday and Sunday, the data was missing. The authors used the data on Friday and next Monday as the data on Saturday and Sunday to form daily continuous data consistent with Bitcoin.
At the same time, the author believes that buying and selling dollars and buying and selling bitcoin are very convenient, there is no time friction and stagnation, so in terms of methods, it is proposed to use the one-way regression analysis method for analysis.
Second, data analysis and results
Using the US dollar index as an independent variable and the bitcoin price as the dependent variable, the author co!nducted a one-way regression analysis of the US dollar index and bitcoin price from January 1 to September 28, 2018.The results are shown below (Figure 1
According to Fig. 1, at a level of 95% confidence, there is a negative correlation between the bitcoin price and the dollar index with Y=-512.02X+55745. Where Y is the bitcoin price and X is the dollar index.
Further analysis shows that the correlation coefficient between the bitcoin price and the US dollar exchange rate in Figure 1 is R = 0.5463, and the correlation between the dependent variable and the independent variable is moderately correlated; the determination coefficient R2 = 0.2984, indicating that the goodness of fit of the regression equation is low. . According to statistical theory, when |R| is greater than or equal to 0.8, it is highly correlated between two variables, and |R| is greater than or equal to 0.5 and less than 0.8, and the two variables are considered to be moderately correlated. When |R| is greater than or equal to 0.3 and less than 0.5, the two variables are considered to be low. Correlation or weak correlation, |R| less than 0.3 indicates that the degree of correlation is extremely weak or not relevant.
In Figure 1, the correlation coefficient R = 0.5463, |R| is greater than 0.5, and there can be a moderate negative correlation between the bitcoin price and the US dollar exchange rate. Therefore, from the regression results, the research hypothesis of this paper is effectively supported.
To further explore the relationship between the US dollar index and bitcoin price volatility, the authors multiply the difference between the daily dollar index volatility by 10,000 (the often said BP difference, the base point) and the daily bitcoin price volatility by 10 (Enlarged 10 times for easy visual display) for comparison, the results are shown below (Figure 2):
Looking at Figure 2, we can see that: (1) There is a certain regularity in the direction of the change of the US dollar index and the direction of the spread of the bitcoin spread, mainly showing the law of reverse motion, such as January 10 and March 14 in the figure. , May 16th, June 30th, September 19th; but sometimes the phenomenon of the same movement, but the number of occurrences is not large, the magnitude is generally not large; (2) after July 2018, regardless of The US dollar index is still the bitcoin price, and the volatility has been reduced. It shows that there is a certain relationship between the two, and that both the US dollar and the bitcoin are faced with one direction. (3) In view of the fact that the US dollar is still in the interest rate hike cycle In the next step, the probability of a stronger US dollar index will be greater, but whether bitcoin is weak or not is judged. After all, the two are only moderately low-lying.
Based on the regression analysis of Figure 1 and the comparative analysis of Figure 2, it can be considered that: (1) Bitcoin price fluctuations and US dollar index changes show a moderate negative correlation. The dollar strength partially causes the bitcoin price to fall, and the weaker dollar partially causes the bit. The price of the currency has risen; (2) With the passage of time, the fluctuation of bitcoin price and the rise and fall of the US dollar index have declined, and may face the choice of change direction; (3) This article only intercepts the data of the first three quarters of 2018. For analysis, from a longer history, the correlation between bitcoin price volatility and the US dollar index is weak, but it does not rule out the formation of certain links at certain stages and at certain points in time.
Reflections
Since the era of human currency, the legal currency has continued to depreciate. Even the mainstream legal currency, such as the US dollar, has exceeded the annual inflation rate by more than 2% since 1980. Nakamoto created the bitcoin, which aims to counter the inflation of the legal currency and reduce the coinage tax that people are forced to pay, but it has gone to the opposite side of things. A fixed amount of bitcoin must have deflation. According to monetary theory, when the currency just meets the needs of actual circulation, neither inflation nor deflation, and this amount is difficult to estimate accurately. Below, the authors share some thoughts on the relationship between Bitcoin and the US dollar:
(1) The Fed’s issuance of the US dollar is anchored by the inflation rate. It is generally considered that the inflation rate must exceed 3% (the actual Fed generally raises interest rates when the inflation rate exceeds 2%), so the US dollar index is a relative indicator. In the long run, the US dollar index always fluctuates around 100 points, while the bitcoin price has no upper limit. Therefore, the US dollar index may not change much after 100 years, and the bitcoin price has unlimited possibilities. We link the two together and the conclusions may only apply to certain stages and some points in time.
(2) Bitcoin price fluctuations are affected by multiple and complex factors, which are not completely explained by a single factor. For the US dollar index, we need to see a moderately negative correlation between bitcoin prices and the US dollar index, as well as other factors such as policy incentives and suppression, event-driven, investor preferences, and psychological expectations. Wait. Only by combining multiple factors and multiple perspectives can some accurate judgments of bitcoin price fluctuations be formed. But even then, it is common to judge the direction, time, and magnitude of the ups and downs. In terms of trading, as long as the probability of correctness exceeds 50%, investors have the opportunity to overcome the market and obtain positive returns. By formulating the right trading strategies, such as appropriate stop loss and take profit, suitable for your own financial leverage, etc., to form your own investment philosophy, and long-term adherence and practice, may yield better returns.
(3) Even with the same incident, the effect on the dollar index and bitcoin price fluctuations is different. From the current point of view, for economies outside the US dollar zone, the safe-haven demand for holding the US dollar is greater than the safe-haven demand for holding Bitcoin. At the beginning of October 2018, the stock market crashed, and Bitcoin fell. Some people think that the bitcoin's hedging function has an abnormality. In fact, due to risk avoidance, people may prefer to hold the US dollar (the US dollar index has a small volatility), and Bitcoin falls. Basically in line with expectations. But Bitcoin's hedging function can't be ignored, so there is a sharp rebound on the 15th. Of course, this explanation is not comprehensive (most people think that the rebound of Bitcoin is related to shorting USDT), and there are also suspects of post-mortem. The readers can laugh.