Investment markets can be analyzed in several different ways. One way is to analyze them based on historical market price development. Here is one example of such a research method based on historical price data.
Next we will make a light analysis about how bitcoin behaves in relation to the US dollar.
Background of the study
The US dollar is a global reserve currency. According to the US central bank FED there are currently $1.9 trillion dollars in circulation. However, the real number is hard to estimate since the markets have already for years doubted official statistics about the amount of dollars.
Partially due to inconsistencies in the current money system, Bitcoin has in the long run even been seen as a challenger to the US dollar on currency markets. However, Bitcoin’s market cap is currently only roughly $220 billion dollars, so Bitcoin still remains a clearly smaller asset class compared to the dollar.
Bitcoin is also not a traditional currency. Some do not even regard Bitcoin as a currency at all, but we can still all agree that Bitcoin has many similar features as the US dollar. Therefore we can assume that the US dollar can be used as a comparison to Bitcoin’s value creation to see how they behave on the markets. But we must remember these are only assumptions.
Premise of the study
The point is to investigate how Bitcoin behaves when the value of the US dollar changes. We will in principle assume that when the markets see the value of the dollar weaken, Bitcoin’s value would in turn grow stronger. This is because we want to study if the markets see weakening dollar value as a factor simultaneously increasing Bitcoin’s value. According to economic theories the value of a currency would weaken if its supply is increased on the markets. This in turn leads to inflation, which means the currency loses value on the markets.
The US dollars have no upper limit on how much of them can be created on the markets. Compared to the US dollar, Bitcoin in turn is not an inflationary currency since only a total of 21 million units will ever exist, and all have not even been created. Therefore we could in principle assume that a growing amount of US dollars on the markets will strengthen Bitcoin’s value.
In the study we will also study the effect of the FED’s open market operations on the prices of the US dollar and Bitcoin. In open market operations the FED issues US dollars into circulation and buys market reserves with these issued funds. Next we will take a look at the time period, during which the amount of US dollars on the markets has increased while also tracking Bitcoin’s movements.
The studied time periods
QE 3 of September 2012
Open market operations of December 2012
Open market operations of December 2016
Open market operations of December 2018
Open market operations of September 2019
Open market operations of October 2019
QE 4 of March 2020
QE 3
On the 13th of September 2012 the FED initiated its third stimulus program. At the same time the FED publicly announced acquiring $40 billion dollars worth of reserves per month with an open market operation. The next day the US dollar started rising again. Meanwhile Bitcoin’s price was steadily growing and no significant changes occurred.
Open market operations of December 2012
On 12.12. the same year the FOMC (Federal Open Market Committee) announced it would double the amount of debt securities bought with open market operations. The US dollar was simultaneously sinking , but without major price changes. However, these operations were not started until January 2013, when dollar futures began rising. Bitcoin’s price did not notably change during this time, but in January 2013 Bitcoin’s price entered a heavy rise.
Open market operations of December 2016
On 15.12.2016 the FOMC gave permission to the Federal Reserve Bank of New York ille (FRBNY) to do open market operations (apparently an extended permission). On the same day US dollar futures rose, after which they continued declining. Bitcoin’s price started a wild rise on 15.12.2016, which only ended two years later between 2017 and 2018.
Open market operations of December 2018
On 18.12.2018 the FOMC announced open market operations. At this point The US dollar had started declining the previous day. Bitcoin in turn started a heavy rise the same day, which ended after the following eight days.
Open market operations of September 2019
On 18.9.2019 the FOMC announced it would continue its open market operations. After this US dollar futures started rising after eight days. Meanwhile Bitcoin rose slightly the next day, after which its prise declined notably.
Open market operations of October 2019
On 31.10.2019 the FOMC announced recommencing its market stimulus. Two days after this dollar futures entered a rise. Bitcoin in turn had a small rise starting from 31.10.2019, but later began declining.
QE4
On 15.3.2020 the FED announced its program as a reaction the crisis incited by the coronavirus. On 23.3.2020 US dollar futures reached their last peaks on the markets. This happened eight days after the FED on 15.3.2020 decided about a massive corona-initiated stimulus package in the US. After the announcement dollar futures began rising and continued doing so until 23.3.2020. Meanwhile Bitcoin reached its bottom values two days earlier on 13.3.2020 as the FED published its plans. After this Bitcoin entered a whopping rise. At this point the assumed effect of dollar inflation impacted positively on Bitcoin’s price rise.
Results
The premise of the study assumed that US dollar futures would decrease upon the announcement of new stimulus programs or open market operations. This did not happen, but instead dollar futures usually rose after announcements. However, it’s a different matter to ask how the weakening of dollar value is defined in reality. Perhaps this is a topic for further research.
While the FED issued new money, Bitcoin’s price usually also rose at least somewhat both during and after announcements of stimulus programs or open market operations. Therefore one could assume that as the FED issues new dollars into circulation, Bitcoin’s price would also enter a rise of some level. This is a very rough generalization, but these are the conclusions the study led to this time.
It’s still good to remember that the sample of this study was very small, so the results can not directly be generalized with real market situations. In addition the study includes many assumptions and generalizations, so they should not be interpreted as proper buying opportunities for any investment instrument.
Nonetheless, here is one example of how the markets can be analyzed rather easily based on historical price data.
Hopefully these tips were helpful!
This article does not present any investment recommendations nor should it be interpreted as such. Gaining profits on the markets often requires deep-rooted knowledge and several years of experience.
The writer is a board member of cryptocurrency organization Konsensus Ry and has years of experience in different investment fields, including cryptocurrencies.
Sources:
https://www.federalreserve.gov/monetarypolicy/quarterly-balance-sheet-developments-report.htm
