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What drives Bitcoin? Factor Analysis Profiles, Part I.

What makes ticking There are many theories ranging from a digital age store of value to the world’s greatest Ponzi scheme. Narratives are interesting and maybe useful, but we can use the risk betas of that Bitcoin quantify exactly? Let’s try a series of factor analysis tests.

The idea of ​​regressing the price of Bitcoin against a number of risk factors came from a tweet by Fernando Vidal of 3Fourteen Research. Using a classification methodology that focuses on stock sectors, the modeling shows that financials are the prime suspect in “explaining” bitcoin price changes.

What drives Bitcoin?  Factor Analysis Profiles, Part I., Crypto Trading NewsProbability of Bitcoin Sector Classification

Let’s examine this in a little more detail by performing a series of factor regressions using multiple sets of economic and market indicators. As a starting point, we’ll use a number of ETFs as proxies for the primary market betas:

  • Global Equities (VT)
  • US Bonds (BND)
  • Global Real Estate (REET)
  • Raw materials (GCC)
  • Foreign Exchange (UUP)
  • Cash (SHV)

There are several caveats, starting with limited data. Bitcoin is a relatively young asset class and so this analysis uses a data set that only extends to 2014. In any case, the main finding is that trying to “explain” Bitcoin’s price volatility through this lens is unsuitable, given by the low multiple R-square: a thin 0.0355. In other words, these six factors explain less than 4% of Bitcoin (BTC) returns, as this metric suggests.
What drives Bitcoin?  Factor Analysis Profiles, Part I., Crypto Trading NewsCoefficients

Not encouraging, but what stands out is that US bonds (), followed by global stocks (), have the largest explanatory betas. Also note the large negative beta for cash (), which implies that whatever explains BTC, safe-haven liquidity – at least in the traditional sense (i.e. Treasury bills) – is not a likely candidate. Meanwhile, commodities (), foreign exchange (), and real estate () are relatively trivial factors.
What drives Bitcoin?  Factor Analysis Profiles, Part I., Crypto Trading NewsBitcoin Betas vs. Global Primary Markets

All of this indicates that the attempt Bitcoin deconstructing through a standard market lens from a global top-down perspective is a dead end. But we’ve only just started exploring our bag of tricks. Chapter 1 is a broke, but the history of analyzing Bitcoin’s betas has only just begun.

Source: Crypto News Deutsch

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