Good morning everyone and welcome to our Chart of the Week series! Every week we provide you with one of the most informative Bitcoin charts, sent directly to your inbox.

This week we dive into a few key Bitcoin correlations to try understand where Bitcoin’s price is headed next. Let’s dive in!

We all know bitcoin has had a rough week. There’s a lot of fear and a lot of doom, but we don’t think things are nearly so bleak.

What Exactly Happened?

In the past week, some economic data and corporate earnings have been announced that’s spooked the markets. Bond yields, generally a barometer of nominal growth expectations, have fallen sharply. In the past 8 days alone, the 10yr treasury yield is down over 25bps (as much as a Federal Reserve cut). The 2yr treasury yield, which essentially leads the Fed’s policy, went from pricing in no rate changes, to eight days later, pricing in a 25bps cut.

Our recent regime has been the opposite- due to the large deficits/debt and inflation worries, rising yields were seen as the bearish indicator. However, we seem to be entering a bit of a growth scare, wherein falling rates are the bearish indicator. Remember, all the 10yr yield really represents, is nominal growth expectations. So, if economic activity is expected to decline (something more akin to a recession), rates come down. Clearly, equity indices like the Nasdaq or S&P 500 do not have good performance during low-growth environments.

Correlations

Therefore, a few reminders are important.

Firstly, bitcoin trades as a risk-on asset, highly correlated to the QQQ/Nasdaq (see our earlier article that expands on this in detail). Zooming in to the mainstream adoption era post-2017, and taking the chart’s timeframe up to a 2-week chart, the correlation becomes quite clear:

Secondly, the strengthening of the Yen is another pressure to US indices. Many have probably heard of the carry trade, where banks/financial firms borrow in yen and invest in USD-denominated assets. Last summer, the Yen strengthened on Bank of Japan rate hike expectations (when the US was set to start cutting rates). Japan may be the only developed country where the interest rate differential vs the US, could actually increase, causing a strengthening in the Yen vs the Dollar.

One way to represent the impact of this carry trade’s impact, can be seen with credit spreads. Credit spreads are very simply, a representation on the difference between a high-risk, high-yield bond and an investment grade (or sovereign) bond yield. Spreads widen when risk is increasing, and spreads narrow when overall risk is decreasing.

The below chart shows a strong correlation between a strengthening of the Yen and an increase in credit spreads:

Thirdly, the obscene concentration in our stock market indices, where seven companies account for a huge, historic share of the overall index, a decrease in this concentration can be extremely negative for the headline S&P or Nasdaq index. However, under the surface, things might be much less scary.

“Implied Correlation” are great indicators for what’s known as “dispersion”. Implied Correlations measure the relative implied volatility of the S&P 500, and its components. Higher measures of Implied Correlations indicate that the market is expecting more widespread moves across the broader equity markets.

This shows the implied correlations and an ETF that tracks the Magnificent 7. We can clearly see that as implied correlations move higher, the Magnificent 7, and therefore the Nasdaq (since those seven names make up such a large portion), move lower.

Summary:

On some of these large red days for the Nasdaq, indices which track the smaller companies in America have actually showed strength, and sometimes even close green, even if the Nasdaq may be down 2%. Ultimately, this rotation is healthy, though it will certainly drag the Nasdaq (and therefore, BTC), down with it.

Ultimately, outside of small price swings, nothing has notably changed in our bitcoin thesis. With harsher treatment of USD-denominated assets likely coming (zero coupon century bond, user fee, taxing interest on treasuries, etc.), countries running trade surpluses will need an asset to store their excess income in.

Bitcoin has no leader, no board of directors and no government. It is completely neutral and decentralized, making it a perfect asset for sovereigns to place on their balance sheet. If growth concerns do not start to materially improve, bitcoin may face more short-term headwinds, but it’s worth watching the fiscal side, given the fact that we are in fiscal dominance regime.

It is also worth noting that the Treasury General Account stands at $790B and a revaluation of gold could double that, should policymakers worry about growth and want some stimulus. We know how positive these pro-liquidity regimes are for bitcoin.

Simply put, we remain buyers of any and all dips.

That’s it for this week - remember to stay humble out there folks and continue stacking sats!