Here’s why bitcoin traders shouldn’t analyze US inflation data overall

Analysts and pundits will scramble to find multiple angles to interpret Bitcoin’s intraday price action whenever major economic numbers are released, and this has become quite common in the past few days.

When the US Bureau of Labor Statistics reports an increase in the consumer price index (CPI).

7.5% on Feb. 10, traders rushed to find some connection to the crypto price action. However, historical correlation data suggests that investors should really look closely to see if there is any relationship between the crypto market or Bitcoin (BTC) and these economic indicators.

General investment recommendations state that traders should ignore intraday movements, especially considering that most assets are not traded 24 hours a day.

More importantly, Bitcoin’s order book depth is significantly different than gold, WTI, and S&P 500 futures. Even when all stablecoin trades are aggregated, Bitcoin’s 7-day average volume is $7 billion, while the top three S&P 500 ETFs handle up to $54 billion in trading volume.

In summary, a large flow of orders from one company can slightly distort the crypto market in the short term, but the impact on WTI oil, S&P 500 and gold tends to be smaller.

Bitcoin Price Action Linked To Inflation Data?

BTC price fell to $43,200 after the US CPI rose 7.5% on Feb. 10, prompting CNBC reporters upload Article about the correlation of two events.

The CNBC article estimated market conditions at the time, but users are advised to use a longer time frame when analyzing economic data. In addition, it is possible that Bitcoin has no correlation with the consumer price index and the hypothesis also needs to be tested.

The long-term chart comparing BTC price and US inflation shows no correlation and no causation, especially when using a logarithmic chart.

US CPI (orange, left) vs. Bitcoin/USD (blue, right) | Source: TradingView

In September 2020, BTC rallied above $11,000 while inflation data stagnated below 1.5%, and most recently in May 2021, when Bitcoin price “cooled off”, failing to break the $60,000 support level while CPI surged as well stalled two months later, in July at 5.4%.

For analysts based on the mathematical formula, the correlation coefficient between BTC price and US inflation ranged from +0.95 to -0.94 over the past 12 months. Therefore, this coefficient has little significance in the statistical method.

Do Traditional Markets Really Correlate With Bitcoin?

Another common mistake is to attribute the correlation of other assets to Bitcoin’s performance. Sure, there might be a few months when these two markets show a 0.65 correlation (positive or negative), but the data suggests otherwise.

Bitcoin, S&P 500, WTI Oil and TIP ETF correlation chart for 30 days | Source: TradingView

For example, the correlation of the S&P 500 to BTC from August to September 2021 is 0.65. However, it is “instant” data as the longer time frame shows no such evidence.

It also failed to find a price relationship between bitcoin and other major assets such as the price of WTI oil and the iShares TIPS Bond ETF, which tracks an index containing U.S. inflation-linked Treasury bonds.

Various data points suggest that investors should ignore intraday price action following the release of economic data as the data sometimes gives a misleading impression of correlation and cause and effect.

While inflation or other data affects pricing in the short term, it does not affect prevailing trends. The correlation chart versus traditional markets leads some to believe that Bitcoin has outperformed many other asset classes.

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