Bitcoin-Gold Correlation

Sudden plunge in correlation between Bitcoin and gold, two assets traditionally seen as hedges against traditional market volatility, hints at seismic shift in their price dynamics.

The correlation between Bitcoin and gold has dropped to its lowest point in the past year, reflecting a major shift in their price movements.

Introduction to Gold and Bitcoin

Gold has often been the currency of choice throughout history because it is a valuable and scarce commodity. Gold acts as a hedge against high inflation and deflation, helping to manage the impact of changing interest rates. As gold is rarer than most other metals, it holds and increases its value well.

Precious metals such as gold and silver help solidify investors’ finances through ownership of tangible physical coins or bars rather than relying on paper assets. The World Gold Council aims to promote and maximise the industry’s potential growth of gold consumption. They set the expected standards and aim to strengthen the markets, which is great for investors.

Unlike a gold-backed (fiat) currency, Bitcoin is backed by blockchain technology and free of a central authority. It began with niche enthusiasts who wanted an encrypted and decentralised system for digital currency. The idea was Bitcoin would be an alternative to the stock market and the banking system. We will look at gold vs bitcoin in greater detail to help you get the right strategy for investing. The first key point is that investing in gold is something that is regulated and understood by central authorities, while Bitcoin is not. Let’s see how else they compare.

Correlation between Gold and BTC HISTORY

The correlation between Bitcoin and gold has dropped to its lowest point in the past year, reflecting a major shift in their price movements.

Despite certain enthusiasts claiming Bitcoin would act as a hedge asset, this did not happen. By the end of 2022, Bitcoin was 76% off its high. In the most explosive inflationary environment since the 1970s and Bitcoin’s first bear market, the asset was getting crushed. There was no debate: Bitcoin was trading like a risk-on asset. And today, it still is.  

That is not to say that the narrative could flip in the future. Personally, that is what I view as Bitcoin’s upside: a store of value akin to gold. But while we can debate whether that may one day happen, it is unequivocal that Bitcoin currently trades like a risk-on asset. These are the facts of the case, and these are undisputed, to borrow Kevin Bacon’s phrase from the absolute classic that is A Few Good Men. 

Gold, on the other hand, traded flat during 2022, and is currently trading close to all-time highs.

The correlation coefficient is currently standing at -0.89, implying an inverse relationship. While gold has seen a modest increase of 4.03% this year, Bitcoin has rocketed by an impressive 83.90%.

Bitcoin correlation with Gold continues to rise since March due to uncertainty amid the banking crisis and higher interest rates. The banking crisis led investors to put their money in Bitcoin rather than gold as it gave higher returns than gold and US equities.

The BTC price currently trades near the $30,000 psychological level, recording a strong rally of 85% this year. Experts believe the BTC price can hit over $135k after the Bitcoin halving next year.

Over the past 14 years, Bitcoin has risen against the U.S. dollar by tens of millions of percentage points. Few asset classes can boast similar returns. Other assets don’t carry the same degree of volatility either, making a long-standing correlation even less likely.

The correlation between these two assets is often highlighted due to their shared reputation as a hedge against traditional markets. The Bitcoin price has seen a substantial uptick due to anticipation surrounding spot Bitcoin ETF filings by major financial institutions, including BlackRock, Fidelity and Invesco.

The June 28 report of the U.S. GDP exceeding expectations has led to notable movements in the economic landscape. In the commodities market, the gold price has dipped below the $1,910 mark, reflecting investor sentiment influenced by robust economic performance.

Bitcoin, however, is charting a different course, climbing higher and surpassing the $30,900 level. This divergence between the two often-compared asset classes has resulted in a significant drop in their correlation.

Currently, the Bitcoin-gold correlation stands at -0.89, marking its lowest point for both the year and the trailing one-year timeframe. This indicates that as gold prices decline, Bitcoin prices are trending in the opposite direction, reinforcing their independent market dynamics.

US Q1 GDP comes in hot at 2.0%

The first quarter of the year witnessed the U.S. GDP outperforming expectations by landing at a 2.0% growth rate, surpassing the anticipated forecast of 1.4%.

The impressive performance runs in tandem with the recent U.S. initial jobless claims data, which reported 239,000 compared to the projected 265,000.

These core economic indicators have influenced the U.S. bond market, instigating a rise in yields across the yield curve.

As a reaction to these data points and shifting bond yields, market sentiment is increasingly skewed toward the anticipation of tighter monetary policy.

Specifically, market participants are now pricing in an 82% probability of a 25 basis point rate hike at the next Federal Reserve meeting.

Should this expectation come to fruition, it would bring the federal funds rate to a range of 5.25-5.50%, reflecting the central bank’s response to stronger economic growth and employment data.

Bitcoin’s correlation with gold is currently at its lowest level since FTX collapsed in November

Our Head of Research writes that while one day Bitcoin may become a store of value, the numbers say it currently trades like an extreme risk-on asset

Bitcoin lost 76% of its value amid the pullback in risk assets once central banks around the world transitioned to tight monetary policy amid the inflation crisis

Meanwhile, gold traded flat and is currently close to all-time highs

Bitcoin’s correlation with growth stocks and riskier sectors of the stock market remains tight.

These ETFs could potentially prove to be a game-changer for Bitcoin, significantly expanding its accessibility to mainstream investors. The much-awaited approval of a spot Bitcoin ETF could potentially spark an inflow of capital that would be similar to what was observed following the launch of the first gold ETFs. Crypto enthusiasts have long speculated that the launch of the first spot Bitcoin ETF could have implications as significant for the Bitcoin price as the launch of the first gold ETF had for gold. The advent of the first gold ETF in 2003 helped democratize access to the lustrous metal. It also resulted in an explosion in the gold price, making the yellow metal a mainstream investment.

Bitcoin As Digital Gold

Per Kaiko’s report, the correlation between Bitcoin and gold now stands at 50%. Meanwhile, its stock market correlation stands at roughly 20%, having been on the decline since December. 

“It’s a significant shift because over the course of 2022 Bitcoin and gold were mostly uncorrelated,” Kaiko analyst Dessislava Aubert told Decrypt. “So, it was not moving as a safe haven [asset] at all.”

Bitcoin bulls have often likened Bitcoin to “digital gold,” even hypothesizing that it could replace the precious metal as a safe haven monetary instrument of the 21st century. Like gold, Bitcoin is reliably scarce, divisible, and pure, but comes with added benefits of digitization that make it an effective form of money. 

For a long time, however, the theory failed to live up to reality. Bitcoin and crypto correlated heavily with the stock market throughout last year, often well above 50%, as risk assets cratered in the face of tightening interest rates from central banks worldwide. 

The unlikely relationship between Gold and Bitcoin

On face value, Gold and Bitcoin are polar opposites. Physical gold bars and coins have an intrinsic value with a millennial track record. It appeals to those seeking to reduce their risk profile. In contrast Bitcoin’s value is truly subjective, with a distinct danger of being worthless if authorities succeed in banishing it from the globe Most of its investors seek the possibility of getting rich, with the knowledge that ownership represents a huge financial risk

But as Bitcoin’s existence has progressed, it’s become apparent that these two ‘alternative investments’ not only share some commonalities but can also appeal to the same investor base.

Both assets provide the opportunity for investors to proactively take control of their finances outside of the traditional banking world. Both investments appeal to those who refuse to accept the control and established investment format.

For those reasons, many of our precious metals investors also own some crypto currencies, including Bitcoin. A very common strategy is to diversify between Gold, Silver, Bitcoin and altcoins. If cryptos rise significantly in value, these investors ‘remove some chips from the table’ by selling some crypto and using funds to solidify that profit into solid gold.

Final Verdict

• Bitcoin has registered 100x improvement over gold as a store of value. The world is realizing this and beginning to reprice digital currency in real-time.
• Although Bitcoin has jumped multi-fold in the last few months, it is likely to continue appreciating in US dollar terms over the coming years.
• Maybe, Bitcoin’s market cap will surpass gold’s market cap by 2030.
• Both gold and cryptocurrency have their own merits and demerits. It all depends on the sole discretion of an investor where he/she wants to invest.

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