The Bitcoin exchange rate has recovered most of the losses it initially experienced during late March as it became clear that COVID would become a global pandemic. The Q2 of 2020 will be remembered for its volatility as the exchange rate of bitcoin versus the US dollar tumbled 60% only to recover completely before running into resistance. For nearly all of 2020, the bitcoin exchange rate against the US dollar has been highly correlated to the S&P 500 index, which makes bitcoin somewhat of riskier assets.
Bitcoin is Correlated to the S&P 500 Index
The movement of bitcoin has been highly correlated to the S&P 500 index. Correlation is a study that measures whether two or more assets move in tandem with one another. A correlation coefficient of 1, means that the returns of two assets move perfectly in tandem with one another. So if the S&P 500 had a return of 10% in April, Bitcoin would also have a 10% return in April. A correlation coefficient of -1 means that the returns of two assets move in the opposite direction. A correlation coefficient of zero means there is no clear pattern between the returns of two assets.
During the Q2 of 2020, the average correlation coefficient of BTCUSD and the S&P 500 index was 70%. That means that 70% of the returns of bitcoin can be attributed to the returns of the S&P 500 index.
How to Trade Bitcoin During the Q3
Riskier assets have rebounded but have yet to be able to take out the highs that were seen in February ahead of the spread of COVID-19. BTC/USD appears to be in a large range between 10,000 and 4,000, but the trends appear to be well defined. A catalyst that could alter the trajectory of bitcoin is the coming equity earnings season. Earnings for most major companies in the S&P 500 index will begin in the 3rd week of July and if they are better than expected could help stock prices break out. Given the tight recent correction between bitcoin and the S&P 500 index, this could also help BTCUSD break out. By watching the S&P 500 index you can determine how to trade cryptocurrency.
In 2020, BTCUSD has also followed a recognizable trend pattern. The short-term trends in the exchange can be viewed using a moving average crossover strategy. This is a strategy that uses 2-moving averages, a shorter-term 10-day moving average, and a longer-term 50-day moving average. A moving average is the average of a certain period that moves with prices. For example, the 10-day moving average is the average of the last 10-days. On day 11, the first day is dropped from the calculation.
You can see from the chart of BTCUSD that when the 10-day moving average crosses below the 50-day moving average a short term downtrend is considered in place. When the 10-day moving average crosses above the 50-day moving average a short-term uptrend is considered in place.
The Bottom Line
The risk management that you can use on a moving average crossover strategy can vary. You might use a stop and reverse strategy where you exit your long position and place a short position when the moving averages crossover. For example, you might buy BTCUSD when the 10-day moving average crosses above the 50-day moving average and stop and sell short when the 10-day moving average crosses below the 50-day moving average. Alternatively, you might consider a percent stop loss or a dollar stop loss. The bottom line is that there are several technical strategies that you can use to trade BTCUSD but what is clear is that the exchange rate is currently correlated to riskier assets and should be view as one until the correlation breaks down.