Bitcoin’s High Correlation to Copper Does Not Bode Well for Short-Term Investors

Bitcoin’s price now correlates more strongly to copper futures than to traditional equity indexes.

BTC’s correlation coefficient relative to copper has risen to 0.84 from 0.27 a month ago, reaching its highest mark since August.

The correlation coefficient measures the pricing relationship between two assets, ranging from -1 to 1. The former indicates an inverse relationship, while the latter implies a direct pricing relationship.

The tightening relationship poses a couple of questions.

1. Analysts often view copper as a proxy for overall economic growth, affectionately calling it “Dr. Copper” for its professorial ability to forecast trends. Does this imply that the macro narrative within the digital asset space will continue?
2. Why has traditional equities’ relationship with copper weakened over the last two months? As early as Oct 6, the S&P 500’s correlation was as high as 0.86 before falling to its current level of 0.14.

On question one, I would say, yes. Absent a black swan or negative contagion event specific to a centralized entity, digital assets still seem very much connected to macroeconomic developments.

But, notably, yields for the federal funds rate, U.S. three-month and two-year Treasurys exceed the yield of 10-year Treasurys.

On point two, equities may be trading at an unjustified premium at the moment. A CoinDesk article on Tuesday highlighted how equities trading has been unaligned to fundamental data, decoupling from its normal relationship with the two-year Treasury bond yield.

Given the decoupling and the price of copper itself, traders may be expecting a reversion to equities, and may place trades accordingly.

Unfortunately, bitcoin traders currently don’t have much cause for optimism about short-term price appreciation.

Prices have been noticeably range-bound for the last 30 days, and appear poised to continue that way.

Sentiment has followed the same pattern, and the Crypto Fear and Greed Index, which has occupied extreme fear and fear territory for months, aligns with September figures.

For long-term accumulators of bitcoin, however, this is likely their season. The increased connection to macro factors has provided stable (if not sluggish) price activity for the asset, providing investors with additional opportunities for accumulation.

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