The Unexpected Connections Between Bitcoin and The Dow

It has been almost 10 years of a consistent attempt to create a new financial investment tool that is digital,…

It has been almost 10 years of a consistent attempt to create a new financial investment tool that is digital, online, and available to buy and sell on the internet 24/7. Out of thousands of ideas out there, Bitcoin is the latest financial craze, skyrocketing in popularity and initializing an entirely new currency market after coming into existence in January of 2009. It is the most traded digital currency and the biggest comparator to centralized currencies and other trading markets.

The Dow Jones Industrial Average, on the other hand, is a 122-year-old an index of 30 of the largest publicly owned companies in the US. It was calculated for the first time in 1896 and has been a staple of financial trading markets since its inception. It is an index for the stock market and a financial investment tool as of itself.

It might seem counterintuitive but if you’re a Bitcoin investor you should be monitoring the Dow Jones Industrial Average. Why? Well, we analyzed datasets to see if the two markets had any relation and we found a significant insight. Don’t believe me? Let me break down the data we analyzed and what we found.

Connecting Between Tradition and Revolution

In every Econ class, there is a point when you’re taught, for example, about the relationship between the trends in stock prices and in interest rates and the price of gold. There are even major academic studies about relationships between financial tools. Perhaps an important part of the evaluation for a financial investment tool is to be able to relate it to another one as a frame of reference for us.

Bitcoin is no different. There are studies focused on finding influences on market trends and attempting to find a positive correlation between Bitcoin value and other market trends.

We were intrigued and set out to get the data to investigate this ourselves.

How’d we do it?

We used two open datasets from Kaggle. Dataset one included information on Bitcoin values – open value, close value, the gap between them, the number of days per week values went up or down. Dataset two included information for the Dow – open value, close value, the gap between them, the number of days per week values went up or down.

We started with the Bitcoin value data and created a growth indicator – a simple counter that determined how many days per given week the gap between days was positive. The growth indicator equaled one if Bitcoin value went up one day per week, equaled two if Bitcoin value went up two days per week, and so on until seven days a week.

Having this new indicator, we shifted the analysis to examine things on a weekly basis. This way we could examine how the current week trends related to the previous week trends as well as how the current week trends related to trends from two weeks prior.

To make it easier to explain we gave each week a descriptor:

  • Current week = (t 0)
  • Previous week = (t -1)
  • Two weeks prior = (t -2)

Then we did the same for The Dow data. We created a growth indicator – a simple counter that determined how many days per given week the gap between days was positive. The growth indicator equaled one if The Dow value went up one day per week, equaled two if The Dow value went up two days per week, and so on until five for going up five days a week (The Dow is only traded five days per week).

If you are curious to see the distribution of the growth indicators you can find it in our interactive dashboard or the full report.

Next, we mashed up the data using the “week id” as our joining point so we could look at the trends from a weekly perspective and compare the movements of the two markets to each other. We wanted to see how much each market moved up and down and at what times the movements occurred in order to see if there was a connection between The Dow and Bitcoin, or if one influenced the other.

We now had a classic dataset for a regression analysis investigation.

What did we find?

We found that upward movements in The Dow values in weeks (t -2) and (t -1) can predict upward movements in Bitcoin value in (t 0). The graph for this actually looks quite nice:

Bitcoin vs The Dow

What does this mean in percentages?

Bitcoin vs The Dow

When The Dow showed five consecutive days of growth in a given week, the Bitcoin showed between five and seven days of consecutive growth per week 38% of the weeks and between three and four days of consecutive growth 50% of the time! Or, on the flip side, when The Dow show zero consecutive days of growth per week the Bitcoin showed between five and seven days of growth 0% of the weeks.

Here are the exact correlation numbers:

Bitcoin vs The Dow

In short, when the Dow went up the Bitcoin went up a week or two later. It appears that the Bitcoin trends follow the Dow trends.

What does this mean for investors?

If you’re investing in Bitcoin, you have a pretty strong indicator to help make more informed decisions on what your next move should be.

If you are planning to invest in Bitcoin, you can look for a good week to start by zooming into the previous week’s growth of The Dow and evaluating your starting point. If you plan to sell your Bitcoin, you can also look at The Dow values and see if you are at a good week to sell or if perhaps it is better to wait another week.

Want to analyze the numbers yourself? Check out our interactive dashboard or read our full report.


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