Want To Know Where BTC Prices Are Going? Watch USD | Hacker News Reader

Want To Know Where BTC Prices Are Going? Watch USD

thegenesisblock.com

36 pointscgi_man23 comments

TFA's author really needs to state what correlation coefficient [1] they're using if they're going to throw out numbers. Primary research like this, apparently done without a solid knowledge of statistics, always sets off my alarm bells.

> The predictive nature of USD for bitcoin may surprise some, but the underlying fundamentals of their high correlation may make sense, at least for the time being. Historically, the US dollar has served as a risk-averse asset, gaining value as traders pull out of other financial products during periods of uncertainty and doubt. Bitcoin seems to be following the same path.

A far more likely hypothesis is that the vast majority of bitcoin users simply want a proxy for USD for doing business on e.g. the silk road.

1. http://en.wikipedia.org/wiki/Correlation_and_dependence

It's denominated in USD already, so increases in USD should be priced in.

Also, Silk Road has become a small part of bitcoin transactions.

It is not denominated in USD. It's a currency, and like any other currency you can exchange it for others, including USD, which is why you often see exchange spot prices in USD.

The exchange rate is denominated in USD. It's the BTC/USD rate... What's in the denominator

One exchange rate is BTC - USD. That does not make the currency itself USD denominated. Bitcoin is almost always denominated in BTC these days. There are other bitcoin denominations, like the Satoshi [1], but these are rarely used as BTC has not appreciated enough in value for them to be useful. You seem to be confused about what denomination means in the context of currency, see [2].

1. https://en.bitcoin.it/wiki/FAQ#What_do_I_call_the_various_de... 2. http://en.wikipedia.org/wiki/Denomination_(currency)

On the contrary: you have confused 'denomination' and 'denominated': http://www.thefreedictionary.com/denominated

> It's denominated in USD already, so increases in USD should be priced in.

No, as explained in the other comment.

> Also, Silk Road has become a small part of bitcoin transactions.

Citation? Also, I was using Silk Road as an example; any transaction which is denominated in USD and simply uses bitcoin as a proxy would further this phenomena. Many places that "accept" bitcoin only do so temporarily. They immediately convert any received bitcoins into USD. The EFF is one such example [1].

1. https://www.eff.org/deeplinks/2013/05/eff-will-accept-bitcoi...

This analysis is interesting, however I have to comments on the methodology:

* Same measure

Comparing USD/INDEX with BIT/USD is a little bit like comparing apples and oranges, as the underlying measure for each of the time-series is different.

Multiplying BIT/USD with USD/INDEX gives us a time-series that is BIT/INDEX. Subsequently USD/INDEX can be compared with the new BIT/INDEX to get the correlation between USD and BIT with the INDEX basket as a measure.

* Correlation is only relevant for non-integrated series

It's well known that correlation for any unrelated random walks can easily be very high (positive or negative) in a spurious and random manner. The solution here might be to take the take first-difference (geometrical) of both series (de-integrating) and then check the resulting differences for correlations.

> first-difference of both series (de-integrating)

Isn't that just the derivative, in Calculus?

For continuous known functions we would look at the mathematical derivative (using stochastic calculus). For sparse sample data with an unknown derivative, we resort to calculating differences between consecutive numbers.

This is noise. If you start looking around for arbitrary financial timeseries that track one another over a short period, you will find spurious correlations. I especially appreciate the author's thesis about the cause:

Historically, the US dollar has served as a risk-averse asset, gaining value as traders pull out of other financial products during periods of uncertainty and doubt. Bitcoin seems to be following the same path.

Yes, bitcoin is definitely right up there behind USD as a low risk asset. Uh huh.

It's not a low risk asset. It's an alternative asset that for the last few months has been used in risk-off periods. There's a difference. Judging by the last sentence of the article, I don't think he expects it to continue trading like that.

You seriously think that people are selling their risky assets and then putting that money in bitcoins?

You'd really think it would move opposite USD. That correlation is ridiculously high, even over just two months. Can't imagine it lasts forever.

Agreed... I don't really understand why it moves opposite of gold either. Does that mean that bitcoin is considered a high risk asset instead of a safety asset?

I would say yes, with the volatility of bitcoin, at this stage in its life, it is considered a high risk asset. It doesn't have the historical precedent to be considered a safe asset, like other commodities

Is that just because gold is strongly anti-correlated to the dollar? I don't know for sure, just speculating.

Bitcoin is an extremely highly volatile 'asset' with nothing backing its value except optimism.

I can only guess that at this point whenever the market sees it increasing against the dollar the majority of the market immediately takes profit by transitioning to USD. Perhaps also most accepters of bitcoin use it as a USD proxy, so the price of say socks on whateveracceptsbitcoin.com isnt .05 bitcoins, but is whatever number of bitcoins equals $2.00 USD, and the bitcoins are immediately converted to dollars after the transaction is complete.

I think those ideas may explain what keeps bitcoin from exploding above its current correlation to USD, what keeps it from radically dipping, I have no clue.

> with nothing backing its value except optimism.

That's not strictly true. It's also backed by the undeniable utility of having a decentralized transaction log that is virtually impossible to compromise in an economically viable way.

"virtually impossible to compromise in an economically viable way."

Just like the enigma cipher...

Provable limited suppy backs Bitcoin. Its intrinsic value comes from its ability to move at the speed of light.

Bitcoin has been at a few 'long term plateaus' right now it's at $100, before it was stuck at $10 for awhile and $5 before that. So yea, in plateau mode, following the dollar makes sense. No doubt though it will jump again.

I'm not sure if this data can withstand scrutiny just yet but I do think it might be an interesting hypothesis because aren't all currencies and markets are intrinsically linked?

Also, because of that wouldn't it be reasonable to say that all currencies are therefore linked to the current price of oil due to the petrodollar controlling most payments for oil, and in turn all currencies would possibly follow the same price curves? I'd be interested to see a third data point, the price of oil, on the chart.

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