New Data Comparing Bitcoin Price and EM FX Might Affect Your Trading Strategy

Financial analysts have taken an interest in finding correlations between the price of Bitcoin and the performance of foreign currencies in an attempt to better understand and predict behavior in what remains a fairly volatile cryptocurrency market. With Bitcoin exploding onto the scene in 2010, seeing massive gains through to 2017 but dropping significantly in 2018, analysts are keen to explore new ways of predicting how it may perform in the upcoming decade.

Why These Five Currencies Were Studied

The data we are about to explore includes analyzes of the movements of the Rand (South Africa), Lira (Turkey), Ruble (Russia), Yuan (China) and Rupee (India). These five currencies were selected for the research as their corresponding countries are more likely to face challenges based on three important shared factors:

• These currencies all have direct investments from beyond their own borders
• Each run a large amount of outside international financing through their current accounts
• Their economies are focused on export growth, subsequently also containing relatively high external debt to gross domestic product

What’s more, these five currencies’ volatility, inflation and bond risk make them somewhat soft targets for poorer performance when compared to other emerging economies.

Technical Analysis of the South African Rand (USDZAR) vs. Bitcoin (BTCUSD)

In the short term, the 5-day correlation indicates a slightly positive comparison between the price of BTC and the performance of the South African Rand. When looking at a wider date range, it becomes evident that the Rand has one of the most prominent correlations with the price of Bitcoin; over the 20-day period it stands at -0.78, which is the largest deficit out of all five sample currencies.

As the third quarter of 2019 swung around, the data shows a significant discrepancy to be noted, namely that as Bitcoin prices fell by over 12%, the South African Rand improved by 1%. Over a 6-month period, the research by DailyFX indicates that the correlation stabilizes somewhat, to 0.17.

Technical Analysis of the Turkish Lira (USDTRY) vs. Bitcoin (BTCUSD)

Similarly to other currencies on our list, the 5-day comparison between the Turkish Lira and the price of BTC shows a positive correlation of 0.31. As with the South African Rand, when considering a longer timeframe (3 to 6 months), the USDTRY shows a significant negative correlation between the performance of the currency and the price of BTC (-0.37 and -0.66 respectively).

This was reiterated by more recent data from DailyFX, which showed new 3-month and 6-month correlations upwards of -0.25 and just below -0.50 for the two, respectively.

Technical Analysis of the Russian Ruble (USDRUB) vs. Bitcoin (BTCUSD)

The Russian Ruble provides somewhat of a curious case study, largely because it reflects a small positive correlation in the immediate term (5-day correlation indicates 0.08), but when moving toward the 3 and 6-month period the picture is slightly different to some of the other currencies on the list: it reflects a similar, consistent positive correlation.

Where an immediately negative comparison was made when looking at the studies of the Rand and the Lira, over the 3-month period the Ruble still shows a positive comparison, only dropping to -0.10 when considering a timeframe of half a year. As a whole, it is however important to note that over the long term, as with the previous two currencies, there is a majority negative correlation between the price of Bitcoin and the performance of the currency.

Technical Analysis of the Chinese Yuan (USDCNH) vs. Bitcoin (BTCUSD)

The 5-day period showcasing a correlation between the Chinese Yuan and the price of Bitcoin indicates a positive comparison of 0.11. This picture changes as time progresses, with the 3-month correlation amounting to -0.18, which is down significantly from the 20-day comparison that landed at -0.47.

Most notably, the Yuan indicates a slightly positive 0.56 correlation for the 6-month period, which mimics what we saw with the South African Rand, albeit that it is significantly higher in a fractional sense, landing at 0.56.

Technical Analysis of the Indian Rupee (USDINR) vs. Bitcoin (BTCUSD)

Last but not least, the Indian Rupee showed a significantly higher correlation over the immediate term, landing on 0.82 over the 5-day period of comparison. This only decreased slightly as we move towards a 20-day correlation, but there is a significant change to a negative correlation which starts around the 3-month mark (-0.07%).
Over a 6-month period, the correlation between the price of Bitcoin and the currency is only slightly positive, at 0.13. As DailyFX’s research indicates, the Indian Rupee has dropped by 1% since the start of the third quarter, while we now know that Bitcoin prices dropped by more than a tenth during this time.

Key Takeaways For Bitcoin’s Future

• From studying the data, we are able to outline a few key takeaways in order to better predict just how the performance of emerging market FX may affect the price of Bitcoin heading into the future:
• What becomes clear from the data is that most currencies have a negative correlation, or some only a fractional positive correlation (bordering on the negative) when factoring in longer-term statistics.
• It also becomes evident that in the short term the correlation can be fairly volatile, as indicated by the different currencies in the study. This is particularly prominent as a result of growing political tensions including the likes of conflict between the US and Turkey, which, for example, hit the Lira hard in recent weeks.
• This indicates just how important the global political landscape is and how much it affects EM FX, and ultimately the price of Bitcoin too. Trade tensions between the US and China, for example, also affect the short term correlations, ultimately weakening the currency but strengthening the price of BTC in the process. A longer-term trade war between the two may well have a very positive effect on the price of Bitcoin in the long run.

But Why Does Cryptocurrency Benefit When EM FX Stagnates?

Many residents of emerging economies use cryptocurrency as intermediaries and a way to move capital around without the knowledge of governmental agencies. The worse the currency is performing, the more likely people are going to use whatever means possible to maintain their lifestyles. Part of the population is essentially using cryptocurrency to subsidize their income or to account for inflationary increases as they are directly affected by a poorer performing currency and economy. This means that demand for Bitcoin increases, and with that, so does the price.

It is important to remember - and historical research by DailyFX reiterates this - that cryptocurrencies like Bitcoin are by no means stable, well-adopted currencies. In countries like South Africa - not dissimilarly to other emerging markets where there is a great emphasis on taxation of cryptocurrency for the first time this year - it is clear that the government has started to take note of its importance in economic and financial management heading into the future. This is partly due to the looming fact that unregulated currencies lead to unfair value on products and services, and ultimately, without fixed controls, there is no way to accurately measure and manage important economic indicators such as inflation.
How This Might Influence Your Trading Strategy for 2020

Keeping this data, expected price swings and new findings in mind, there are a few important indicators over and above the data that you should keep a close eye on when deciding on your trading strategy going into the new decade.

As formally indicated by the Emerging Markets Crisis Monitor, these include:

• The state of bond risk premia, which has always been important to keep in mind
• The state of external debt to Gross Domestic Product ratios (especially with regards to emerging markets)
• FX volatility - which, as indicated by the research data here, has a major role to play in the performance of any digital currency

Photo by Austin Distel on Unsplash