Understanding Cryptocurrency And Forex Correlation
To fully grasp the most popular investment models of recent years, the Cryptocurrency and Forex correlation, it is necessary to redefine the dynamics of these two markets.
The relationship between two different asset classes and the markets of these asset classes is defined as the cryptocurrency and forex correlation.
In recent years, it has been observed that the fluctuations in these two markets are not independent.
For example, financiers or investors have observed that Bitcoin, one of the popular cryptocurrencies, and the Dollar currency, which affects popular forex pairs, directly or indirectly affect each other in different fluctuation periods.
Although many factors directly affect the cryptocurrency and Forex correlation, side factors such as global economic developments, interest rates, and investor sentiment in different markets can also cause quite effective results.
For an investor to grasp this correlation well and to sense in which direction and how the markets affect each other, they need to have a basic level of financial literacy.
In addition, being informed about global developments is an essential requirement to analyze the correlations of different markets well.
What Is Cryptocurrency And Forex Correlation?
Cryptocurrency and Forex correlation refers to the interactions between cryptocurrency markets and forex markets where exchange rates are bought and sold.
For example, Ethereum, one of the popular cryptocurrencies, and USD/JPY, one of the popular forex pairs, can sometimes continue similar trends in the same or opposite directions.
However, it is not always easy to determine which cryptocurrency has a direct relationship with which forex pair, i.e. to determine the Cryptocurrency and Forex correlation. Because this correlation does not always interact directly and can tend to affect each other indirectly.
Investors who simply follow the Cryptocurrency and Forex correlation use the expressions +1, -1, and 0 to simply express what the next market trend will be, in which direction the trend is, and what results the interaction between currency pairs and cryptocurrencies will produce.
For example, if the correlation is +1, it is possible to understand that two different asset classes followed in two different markets are in a similar trend. However, when we define the correlation as -1, it can be determined that there is an appreciation or depreciation in the opposite direction.
How Strong Is The Correlation Between Cryptocurrencies And Forex Pairs?
Considering how strong the cryptocurrency and forex correlation is, it would be wrong to claim that there is a very strong correlation, unlike the correlations of other markets.
It would be more accurate to express the correlation of the markets where these two different asset classes are evaluated as medium-level or occasionally variable.
The increase in people’s tendency towards digital asset classes during the pandemic period also strengthened the cryptocurrency and forex correlation. However, we observe that the correlation between these two different markets is weaker in recent years.
If the fluctuations of these two different markets are becoming more independent of each other, it would be correct to say that the cryptocurrency and forex correlation is gradually losing strength.
However, there may be times of strong correlation between Bitcoin, the most reliable cryptocurrency in terms of liquidity and volatility, and the USD.
In periods when global uncertainties intensify, investors make some optimizations in their portfolios managed through forex pairs and cryptocurrencies, and this strengthens the correlation.
However, we should not forget that this correlation is not a fixed value. In other words, it may not be a very scientific approach for an investor to determine trends in the cryptocurrency market through fluctuations in the dollar exchange rate under normal market conditions.
Factors Influencing Cryptocurrency And Forex Correlation
In today’s world where globalization is increasingly widespread, many factors directly affect the cryptocurrency and forex correlation. The ones with the greatest impact can be listed as follows:
- Macroeconomic data and central bank policies
- The global power of the dollar
- Regulations
- Market sentiment variability
- Investor psychology
As with every investment model, macroeconomic data such as interest rates directly affect the cryptocurrency and forex correlation. The value of the dollar in global markets directly/indirectly affects the relationship established by investors with cryptocurrencies.
The increase in global uncertainties in the markets may encourage investors to turn to new asset classes or safe havens.
Such periods directly shape the cryptocurrency and forex correlation positively or negatively. The regulation factor is also among those that directly affect the correlation.
If we enter a period in which digital asset classes such as cryptocurrencies are officially recognized by states and the relevant regulations are rapidly established, cryptocurrencies will be accepted as an alternative investment model in addition to primitive asset classes such as dollars or gold.
These developments will also lead the cryptocurrency and forex correlation to a stronger model.
How Traders Use Cryptocurrency And Forex Correlation In Strategies?
Although the cryptocurrency and forex correlation is not an actively used tool in investment strategies for investors at different levels, being able to analyze this correlation contributes to determining future trends.
For example, an investor opens long positions in a period when the dollar is losing value, expecting the USD to gain value in the next period. In such a period, it may be a good strategy to resort to ways to evaluate their assets through cryptocurrencies.
In periods of intense global uncertainty, investors can evaluate arbitrage, portfolio diversification, or hedging strategies together to correctly determine this correlation.
However, no investor can determine this correlation 100%. Because they are two independent markets and their dynamics are variable.
Major Forex Pairs Most Correlated With Cryptocurrencies
There are some common pairs where the correlation between cryptocurrencies and Forex is most clearly observed. Some major examples of these where the correlation can be felt are as follows:
- EUR/BTC
- BTC/USD
- EUR/USD
These pairs are used to scientifically determine the correlation of the common forex currency pairs USD and EURO with the most popular cryptocurrency, Bitcoin.
The change in the value of the popular forex currency pair EUR/USD in different periods can cause the interest in cryptocurrency exchanges to change positively/negatively, revealing the correlation between cryptocurrencies and Forex.
For investors to profit from these fluctuations, they need to follow global developments, increase their financial literacy levels, and understand the different dynamics of different markets.
The Impact Of Market Volatility On Cryptocurrency And Forex Correlation
Cryptocurrency and forex correlation is directly affected by market volatility. Within the changing global conditions, volatility in the markets also changes periodically, and this change can result in fluctuations in the values of currency pairs.
If volatility is high in a market, the correlation is felt much more clearly in parallel or in the opposite direction. For example, during a global crisis, investors may turn to reliable asset classes and change the supply-demand balance of cryptocurrencies.
From time to time, even reliable asset classes in terms of volatility such as USD and EURO may not be the first choice for investors in forex markets. It is known that portfolios managed and diversified with different currencies such as JPY are more profitable from time to time.
In summary, we can say that market volatility directly affects cryptocurrency and forex correlation, but determining whether it affects it positively/negatively depends on the conditions.
Each market and each period creates its own special conditions and makes it impossible to talk about a fixed correlation relationship.
Benefits Of Understanding Cryptocurrency And Forex Correlation
If investors can analyze the cryptocurrency and forex correlation sufficiently and interpret the data correctly, they will be managing profitable investment portfolios by predicting price fluctuations in the markets.
So what are the benefits of understanding this correlation correctly for investors?
First of all, scientifically integrating the signals from different markets and creating the next actions from this perspective reduces the risk factor. In this way, investors become more flexible in their investment plans.
Predicting the possible results of this correlation and shaping investment strategies accordingly brings a great process for financial stability.
Understanding and correctly analyzing the correlation creates separate investment identities not only in a single market but also in both forex and cryptocurrency exchanges.
You can benefit from diversification strategies by managing profitable investment portfolios in these two different markets. Investors who implement hedge strategies more accurately discover opportunities in both markets early and make profits from possible fluctuations.
Investors who can analyze the correlation between any two markets on a scientific basis make more realistic determinations based on analysis in the light of technical and fundamental analysis tools instead of emotional reactions and develop their strategies accordingly.
Thanks to more conscious investment decisions, their returns are higher than investors who are not competent in analysis.
How To Hedge Risks Using Cryptocurrency And Forex Correlation?
Since the cryptocurrency and forex correlation also includes some risks, some tips can be listed to protect investors from these risks. For investors who aim to make a profit from this correlation, opening a transaction in a parity opposite to the correlation will provide balance.
For example, if investors are in a high-risk period for the coin they follow on cryptocurrency exchanges and the value of this coin is decreasing in dollars, a USD-long position in the forex market can be a good solution in terms of risk management.
Although these two markets are two independent ecosystems, investors who aim to return on this correlation can analyze the correlation with the help of fundamental and technical analysis tools for risk management and create balancing strategies on assets that move in the opposite direction in light of this analysis.
Common Misconceptions About Cryptocurrency And Forex Correlation
Unfortunately, there is a lot of misinformation about cryptocurrency and forex correlation circulating on social media platforms today.
Amateur comments or misconceptions such as when Bitcoin rises, the dollar will fall, correlation is fixed, and reverse correlation will provide a hundred percent hedge can mislead investors.
Correlation is not always fixed and is variable for both forex and cryptocurrencies in rapidly changing market conditions. Unfortunately, reverse correlation does not always provide a hedge.
In short, developing a strategy on a fixed fact will always be misleading and will not eliminate the risk factor. It should not be forgotten that there is a correlation relationship that changes according to changing market conditions.
No financial expert or cryptocurrency expert can analyze this correlation 100% correctly. If you read definitive statements on the analysis of this correlation on a social media platform, walk away and remember that there is always room for error in these markets.
Social media platforms in particular contain many misdirections, misunderstandings and manipulative comments regarding cryptocurrencies and exchanges. This is why social media platforms should not be the only sources you feed on as an investor.
In addition, you should be open to developing your financial literacy all the time. However, if you have a basic level of financial literacy, you can analyze cryptocurrency and forex correlation more accurately at the right time.
Future Trends In Cryptocurrency And Forex Correlation
The forex market and cryptocurrencies, which will continue to be the most popular investment models for the future, will continue to attract attention from both governments and institutions.
In recent years, many developed countries have introduced state-backed digital asset classes called CBDC, and will continue to increase in the future.
Developing artificial intelligence solutions will make the correlation and results of cryptocurrencies and forex easier to analyze for everyone. This will eliminate the competitive advantage.
With the development of big data analysis and algorithmic systems every day, investors who want to pursue a career in this field and manage high-yield portfolios will have a lower margin of error when analyzing correlation.
In the future, people’s interest in fully digital investment models will increase even more. Forex markets and cryptocurrencies, which are fully digitally managed investment models, will continue to be popular investment models in the future.
However, in the future, developing technology and tools will make it easier for investors of all levels to read market analysis and correlation. In such a market, you must improve yourself now to gain a competitive advantage.
If you try to analyze cryptocurrency and forex correlation well today, you will earn without wasting time when future opportunities come.
See you in the next post,
Anil UZUN