Learn how intermarket analysis unlocks valuable insights from traditional markets to inform smarter cryptocurrency investment decisions.
Intermarket analysis in the cryptocurrency market is an approach which examines how traditional financial markets like stocks, bonds and commodities influence the price movements of cryptocurrencies.
A survey revealed that technical analysis was the foundation for 66% of all essential research work. Fundamental and general analysis accounted for 23% and 11%, respectively, of the research.
Intermarket analysis can be integrated in the cryptocurrency market as part of your trading strategies for profitable opportunities. Continue reading to find out how.
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Key Takeaways
- Intermarket analysis in the crypto market incorporates data and trends from established markets for understanding factors influencing crypto.
- Analyzing correlations and divergences between crypto and traditional markets helps reveal trends that technical analysis alone might miss.
- External factors like economic data or geopolitical tensions can influence crypto prices through their impact on traditional markets.
- Intermarket analysis allows you to develop better risk mitigation strategies for your crypto investments.
What is Intermarket Analysis in Cryptocurrency?
Intermarket analysis is an analytical approach that examines the relationships between different asset classes. It is a way in which you can look beyond the individual price movements of cryptocurrencies and also into how traditional financial markets like stocks, bonds, and commodities influence crypto prices.
This sort of analysis enables you to gain valuable insights into the often-volatile cryptocurrency market.
Why is it Valuable for Cryptocurrency Traders?
The cryptocurrency market, despite its growth, is still relatively young and lacks the historical data of established markets. This can make traditional technical and fundamental analysis less effective in predicting future price movements.
Intermarket analysis bridges this gap by incorporating data and trends from more mature markets to provide a broader perspective for your trading decisions. Here’s how it benefits crypto traders:
- Identifies Hidden Trends: This is through correlations between crypto and other markets to reveal trends that might not be readily apparent in crypto price charts alone.
- Anticipates Market Shifts: Intermarket analysis can help you anticipate potential turning points in the crypto market by recognizing how external factors might influence crypto prices.
- Improves Risk Management: The interconnectedness of markets lets you better assess potential risks associated with your crypto investments and develop effective risk mitigation strategies.
- Provides Broader Context: Traditional technical and fundamental analysis primarily focus on the cryptocurrency itself. Intermarket analysis however offers a broader perspective to give you an understanding of the factors influencing crypto prices.
- Uncovers Divergence Opportunities: Recognizing divergences between crypto and traditional markets can be highly informative. These divergences can signal potential trend reversals or opportunities to go long or short on a cryptocurrency based on the underlying market sentiment.
Elon Musk’s tweets have the uncanny ability to move the crypto market. A single tweet mentioning Dogecoin caused its price to surge by 5,000% in just a few weeks!
Recommended reading: How to Interpret Crypto Market Patterns for Successful Trading
Limitations of Traditional Technical and Fundamental Analysis in Crypto
Although technical and fundamental analysis are valuable tools for any crypto trader, they have limitations, particularly in a young and evolving market like crypto:
- Limited Historical Data: Cryptocurrencies lack the extensive historical data of traditional assets, making it challenging to identify reliable technical patterns.
- Rapid Innovation: The fast-paced nature of the crypto space means fundamental factors can change quickly, limiting the predictive power of traditional fundamental analysis.
- External Influences: The price movements of cryptocurrencies are often influenced by external factors beyond the scope of traditional analysis, such as regulatory changes or celebrity endorsements.
Intermarket Analysis: The Crypto-Traditional Market Relationship
The relationship between cryptocurrencies and traditional markets is complex. However, some key factors demonstrate how established markets can influence crypto prices:
Stock Market Performance
A strong performance in the stock market can often lead to increased investor confidence and risk appetite, potentially driving capital into the crypto market and pushing prices up. Conversely, a bear market in stocks can trigger a flight to safety, causing investors to withdraw from riskier assets like crypto, leading to price declines.
For example, the 2021 bull run in Bitcoin coincided with a strong performance in the S&P 500 index.
Bond Yields
When interest rates rise, the returns offered by bonds become more attractive, potentially drawing investment away from cryptocurrencies. On the other hand, low-interest-rate environments can make crypto seem like a more appealing option, potentially boosting prices.
For instance, the Federal Reserve’s interest rate hikes in 2022 have been linked to a decline in Bitcoin’s price.
Commodities Market
Certain cryptocurrencies can be influenced by the price movements of commodities they are perceived to be similar to.
For instance, Bitcoin’s price might exhibit some correlation with gold, as both are sometimes viewed as hedges against inflation.
As a result, during periods of high inflation, investors might seek alternative stores of value like Bitcoin, potentially driving up its price.
The Rise of Stablecoins and their Role as Bridges Between Markets
Stablecoins are cryptocurrencies pegged to the value of a fiat currency (like the US dollar) or other assets. Their emergence has played a significant role in bridging the gap between traditional and crypto markets:
Increased Liquidity
Stablecoins provide crypto investors with a way to quickly enter and exit the market without having to convert their holdings back to fiat currency, improving overall market liquidity.
For example, you can use Tether (USDT) to move funds between different cryptocurrency exchanges efficiently without converting back to fiat. This lets you take advantage of arbitrage opportunities and maintain liquidity.
Reduced Volatility
Stablecoins offer a relatively stable value proposition compared to other cryptocurrencies, attracting investors who might be hesitant about the volatility associated with traditional crypto assets.
You might want to use USD Coin (USDC) to park funds during periods of high market volatility to avoid losses from fluctuating prices of more volatile cryptocurrencies like Bitcoin (BTC).
Fiat On-Ramp
Stablecoins act as a bridge for traditional investors to enter the crypto market by allowing them to purchase crypto assets using fiat currency through stablecoin exchanges.
You could buy USDT with USD on a stablecoin exchange like Coinbase and then use USDT to purchase various cryptocurrencies on different platforms.
This increased interaction between traditional and crypto markets through stablecoins fosters a more interconnected financial ecosystem.
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Intermarket Analysis and Global Economic Factor
The cryptocurrency market is not immune to global economic events. Here’s how some key factors can impact crypto prices:
Interest Rate Hikes
As mentioned earlier, central bank decisions to raise interest rates can impact investor risk appetite and potentially lead to capital flight from cryptocurrencies.
In 2022, the Federal Reserve’s decision to increase interest rates led to a significant drop in the prices of major cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH). Investors moved their funds to traditional assets like bonds and savings accounts, which became more attractive due to higher yields.
Geopolitical Tensions
Periods of geopolitical instability can trigger risk aversion among investors, potentially leading to a sell-off in crypto assets as investors seek safe havens.
In April 2024, Bitcoin experienced a significant decrease in value due to a sudden escalation in geopolitical tensions. The price dropped from approximately $70,000 to $62,000, a decline of over 10%, following the news that Iran’s conservative leadership had initiated a large-scale aerial attack on Israel. Some altcoins also experienced a notable decline, with some currencies dropping by 15% or more.
The Russia-Ukraine conflict also continues to cast a shadow over the global economy, particularly in financial markets. Trading volumes in major stock market indices, such as the S&P500, CAC40 and DAX, have declined significantly. The highly volatile cryptocurrency market has also been deeply affected, experiencing substantial fluctuations and impeding Bitcoin trading volume.
Geopolitical tensions can also drive investors towards decentralized assets like Bitcoin, which might be perceived as less susceptible to government control.
In the early days of Bitcoin, some people even mined it using their gaming consoles.
Top Strategies for Implementing Intermarket Analysis in Crypto
Here are some of the top strategies for implementing intermarket analysis in crypto:
Analyzing Correlations Between Markets
One of the cornerstones of intermarket analysis is identifying correlations between the cryptocurrency market and other asset classes. Here’s how to approach this:
Identifying Statistically Significant Correlations
There are various statistical tools to measure the strength and direction of the relationship between two markets. A common metric used is the Pearson correlation coefficient. This coefficient ranges from -1 to 1, where:
- -1 indicates a perfect negative correlation: When one market goes up, the other goes down (and vice versa).
- 0 indicates no correlation: The price movements of the two markets are independent of each other.
- +1 indicates a perfect positive correlation: When one market goes up, the other goes up as well (and vice versa).
The correlation coefficient between cryptocurrency prices and relevant traditional market indices (e.g., S&P 500) helps you assess the level of interdependence and make informed trading decisions.
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Visualizing Correlations with Charts and Technical Indicators
Don’t just rely on numbers. Visualizing correlations with charts can significantly enhance your analysis. Here’s how:
- Overlay Charts: You can overlay price charts of the cryptocurrency you’re interested in with charts of relevant traditional market indices. This allows you to visually identify periods where the price movements seem to be mirroring each other.
- Technical Indicators: Apply technical indicators typically used in traditional markets (e.g., Moving Averages, Relative Strength Index) to both crypto and traditional market charts. If the indicators generate similar signals across both markets, it can further strengthen the evidence of a correlation.
Divergence and Its Significance
While correlations offer valuable insights, divergences between crypto and traditional markets can also be highly informative. A divergence occurs when the price movement of a cryptocurrency contradicts the price movement of a typically correlated traditional market. Recognizing these divergences can help you identify potential trend reversals or opportunities:
Recognizing Divergences
Look for situations where the price of a cryptocurrency is moving in the opposite direction of a traditionally correlated market index. For example, if Bitcoin’s price is steadily rising while the S&P 500 is experiencing a decline, this is a divergence.
Interpreting Divergences
Divergences don’t guarantee a trend reversal, but they can be a signal of a potential shift in market sentiment. Here’s how to interpret them:
- Bullish Divergence: If the price of a cryptocurrency is trending upwards while a correlated market is trending downwards, it might suggest that the crypto market is decoupling and poised for further gains despite weakness in traditional markets.
- Bearish Divergence: Conversely, if the price of a cryptocurrency is trending downwards while a correlated market is trending upwards, it could indicate that the crypto market might be weakening despite overall positive sentiment in traditional markets.
Examples of Divergences in Crypto Market
Here are some notable examples to illustrate the concept of divergences:
In late 2017, Bitcoin’s price surged dramatically, while the stock market remained relatively flat. This bullish divergence could be interpreted as a sign of excessive speculation in the crypto market, foreshadowing the subsequent price correction in early 2018.
During the March 2020 market crash triggered by the COVID-19 pandemic, Bitcoin initially experienced a sharp decline alongside traditional markets. However, it quickly recovered, exhibiting a bullish divergence. This could be seen as an indication of Bitcoin’s potential as a hedge against traditional market downturns.
Leveraging News and Events from Other Markets for Intermarket Analysis
News and events from traditional markets can significantly impact crypto sentiment and price movements. Here’s how to stay informed:
Economic News Releases
Economic data releases like inflation reports, employment numbers, and central bank decisions can influence investor risk appetite and potentially spill over into the crypto market.
For instance, high inflation might drive investors towards Bitcoin as a perceived hedge, while rising interest rates could dampen risk appetite and lead to a sell-off in crypto assets.
Monitoring Regulatory Changes
Regulatory developments in traditional markets can have a direct impact on the crypto space. For example, stricter regulations on cryptocurrency exchanges in a major economy could lead to a decline in crypto trading activity globally.
Building a News & Events Calendar for Intermarket Analysis (Tips for creating a comprehensive calendar)
To effectively leverage news and events from other markets, consider building your own intermarket analysis calendar:
- Identify Key Events: Research and include upcoming economic data releases, central bank meetings, and potential regulatory changes from major economies.
- Cryptocurrency Correlation: For each event, note the traditional market sectors that typically have the strongest correlation with the cryptocurrency you’re interested in.
- Potential Impact: Briefly assess the potential impact of each event on crypto sentiment (e.g., inflationary data might be bullish for Bitcoin).
- Monitoring Resources: Include links to relevant news sources and economic calendars for easy access to updates and further analysis.
Unlike traditional currencies, there’s a finite amount of Bitcoin that can ever be created – only 21 million! This scarcity is a key factor driving its value.
Risks of Intermarket Analysis for Crypto Traders
Here are some of the risks of intermarket analysis for cryptocurrency traders:
False Correlations
Correlations between markets can change over time, and past correlations don’t guarantee future outcomes. Relying solely on correlations without considering other factors can lead to making losing trades.
For instance, during a period of economic stability, Bitcoin (BTC) and gold might show a positive correlation. However, during a financial crisis, this correlation might break down, causing people who relied on this correlation to make incorrect predictions.
Market Noise
The sheer volume of news and events from various markets can be overwhelming. Focusing too heavily on external factors can lead to information overload and hinder your ability to make clear trading decisions.
Let’s say you track news from multiple global markets, including equities, commodities, and forex, you might struggle to filter out relevant information. This could lead to missed trading opportunities.
Limited Predictive Power
Intermarket analysis is not a crystal ball. While it can provide valuable insights, it cannot predict the future with certainty. Unexpected events or changes in market dynamics can render your analysis inaccurate.
Technical Complexity
Implementing intermarket analysis effectively requires a good understanding of both traditional and cryptocurrency markets, as well as the ability to analyze complex data sets. This can be a challenge for beginner traders.
For example, if you are a new trader you might find it difficult to understand how bond yields, commodity prices and forex rates interact with cryptocurrency prices. This may make you misinterpreted the data and make incorrect trading decisions.
Overreliance on Indicators
While technical indicators used in intermarket analysis can be helpful, relying solely on them can be risky. It’s crucial to combine intermarket analysis with other forms of analysis, such as fundamental analysis, to make well-rounded trading decisions.
Advanced Techniques for Intermarket Analysis
Here is a look into advanced techniques for experienced traders looking to maximize the utility of intermarket analysis in their crypto trading strategies.
Utilizing Technical Indicators Across Markets
While traditional technical analysis often focuses on individual cryptocurrencies, intermarket analysis encourages applying those same indicators to both crypto and traditional markets. Here’s how:
Applying Traditional Indicators
Technical indicators like the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Bollinger Bands can be used to analyze price movements and identify potential entry and exit points in both crypto and traditional markets.
Identifying Intermarket Confirmations
By comparing the indicator signals across correlated markets, you can gain stronger confirmation for potential trading opportunities.
For instance, if an RSI on Bitcoin indicates overbought territory while the RSI on the S&P 500 also reflects overbought conditions, this strengthens the case for a potential correction in both markets.
Building Intermarket Trading Models
For highly experienced traders seeking automation and efficiency, intermarket analysis can be integrated into algorithmic trading strategies. Here’s a breakdown of the process:
Integrating Intermarket Analysis
Develop trading algorithms that incorporate data feeds from both crypto and traditional markets. This may involve factors like price movements, technical indicators and economic data releases.
Backtesting and Refinement
Historical data is crucial for testing the effectiveness of your intermarket trading model. Backtest your model across various market conditions to assess its performance and identify areas for improvement.
Continuous Refinement
Regularly refine your intermarket trading model based on backtesting results and ongoing market changes to ensure it remains effective.
Building intermarket trading models requires advanced programming skills and a deep understanding of both technical analysis and algorithmic trading. However, for experienced traders, it can be a powerful tool for profiting from complex market dynamics.
Recommended reading: Impact of Crypto Regulations And Government Policies
Risk Management and Best Practices
Intermarket analysis is a tool, not a guarantee. Even with strong correlations or divergences identified, unexpected events can still disrupt your trades. Always adhere to sound risk management practices like position sizing, stop-loss orders and diversification to limit potential losses.
Intermarket analysis, while powerful, is not without its risks. Here’s how to ensure you approach it with a risk management mindset:
Strategies for Mitigating Risk
Here are some strategies for mitigating risk:
- Correlations: Don’t blindly follow correlations. While they can be helpful, they can also change over time. Always consider other factors like market sentiment and fundamental analysis before making a trade.
- Divergences: Divergences can signal potential opportunities, but they are not guarantees. Always manage risk by having a clear exit strategy in place if the market doesn’t move as anticipated.
Best Practices for Implementing Intermarket Analysis
Here are some of the best practices for implementing intermarket analysis:
- Start Simple: Begin with analyzing correlations between major cryptocurrencies and a few key traditional market indices like the S&P 500. Gradually incorporate more complex factors as your understanding grows.
- Combine Analysis Methods: Don’t rely solely on intermarket analysis. Integrate it with traditional technical and fundamental analysis to gain a well-rounded perspective on potential trades.
- Focus on High Probability Setups: Look for situations where intermarket analysis aligns with other technical and fundamental indicators, suggesting a higher probability of success for your trade.
Conclusion
Intermarket analysis in cryptocurrency is important and can be used to incorporate data from traditional financial markets. Through it, you gain valuable insights that traditional technical and fundamental analysis might miss.
This approach allows you to anticipate market shifts and make informed investment decisions.
Intermarket analysis is a tool which, when combined with proper risk management and other analytical methods, can significantly enhance your crypto trading experience. Regardless of your experience level, intermarket analysis helps you to trade cryptocurrency with confidence.
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