With Oil Prices Rising, Bitcoin Remains Stuck Below $85,000. Here's Why I'm Still Buying Bitcoin Right Now.

In this news:

Key takeaways

Bitcoin is down 2% in October after a strong 45% rally between July and September.
Rising oil prices near $100 are driving short-term inflation fears and central bank rate hike concerns.
Historically, long-term rolling correlation coefficients between Bitcoin and oil benchmarks hover around zero.

Bitcoin's oil feedback mechanism

In the period from July to September, the price of Bitcoin soared from $60,000 to $87,000, a gain of 45%. In October, though, Bitcoin is down 2% with just a week to go.

The primary culprit appears to be soaring oil prices. As long as the price of oil hovers around $100, the price of Bitcoin remains stuck.

That shouldn't be happening, though. Historically, Bitcoin has been uncorrelated with any major asset class. So why does the price of Bitcoin now appear to hinge on what's happening in the Middle East?

To answer that question, it's useful to review the typical oil feedback mechanism that investors keep talking about right now. In this scenario, rising oil prices lead to inflation fears. In turn, this puts pressure on central banks such as the U.S. Federal Reserve to raise rates. These rate hikes are bad for risk assets, and that leads to a sell-off in Bitcoin.

That sounds simple enough, but is it really true? In the past, extensive research has shown that there is no persistent correlation between Bitcoin and the price of oil. In fact, long-term rolling correlation coefficients between Bitcoin and major benchmarks like WTI or Brent crude typically hover right around 0. In other words, there is no positive correlation, and there is no negative correlation.

Of course, there have been short periods of correlation between Bitcoin and oil, such as we're seeing now. However, over longer time horizons, these correlations disappear. That's why I'm hopeful that Bitcoin can soon reverse course, no matter how high the price of oil goes. I'm putting my faith in the historical data.

So what matters for Bitcoin now

Interestingly, the narrative around Bitcoin seems to shift on a daily basis. On any given day, there's a different reason offered for why Bitcoin is rising or falling in price. However, much of it is noise and not signal.

If a tech company reports higher-than-expected earnings, for example, the price of Bitcoin might also rise. That will lead to analysts saying that Bitcoin is now behaving like a high-beta tech stock. That just happened, in fact. SpaceX reported higher-than-expected revenue, the price of Bitcoin rose, and analysts said that investors should keep an eye on tech company earnings and investor appetite for risk assets.

Ultimately, Bitcoin is a long-term, buy-and-hold asset. It is prone to enormous volatility over the short haul, and that's why it's counterproductive to pay attention to daily swings in price either up or down. Focus on the big picture, and let Bitcoin be Bitcoin. That's why I'm buying Bitcoin right now, even if the price of gas at the pump is on everyone's minds these days.

Share the article: