The one-month correlation between Bitcoin (BTC) and gold hit a record 68% as Bitcoin hit $ 12,000 in early August. However, the following week the correlation collapsed by 20%. Even so, Bitcoin seems to become digital gold in 2020, taking into account price correlations and trends in the futures market.
Both gold and Bitcoin have had an exceptional year of sales since the beginning of the year. According to Skew Analytics, gold had a year-to-date return of 27.93%, while Bitcoin had a year-to-date return of 71.68%. Although Bitcoin has a much higher volatility than gold, investors seem to be focusing on assets with stored value like gold and bitcoin in these uncertain times of the pandemic.
The same thing just different
Bitcoin and gold are completely different assets in the traditional sense, largely due to liquidity as they are present at different stages in the asset lifecycle. The market value of gold is currently $ 9 trillion while Bitcoin is only valued at $ 228 billion.
Notwithstanding these large differences, gold and Bitcoin are largely related because of two similar aspects: Both origins are “metal” and their scarcity requires inflexible supplies. The latter means that regardless of the level of the price of the asset, the supply cannot be increased due to production restrictions. Goods with elastic supply are not scarce and can therefore not be viewed as a store of value. “While any asset can have value based on supply and demand, the limited availability of gold and BTC provides a unique graph as a store of value,” Dan Kohler, liquidity director on the OkCoin cryptocurrency exchange, told Cointelegraph.
Kohler also noted that Bitcoin fluctuations hurt the title of ‘digital gold’ as it appears to become a safety factor: “Bitcoin has tried to hold this title as well, but periods of high volatility in the past have prevented it from doing more are gaining market share for this title. “Dennis Vinokurov, head of research at BeQuant – a cryptocurrency exchange and institutional brokerage firm – told Cointelegraph that bitcoin extremists like deflationary assets, adding,” Given the safe haven and inflation hedge that gold holds, it is probably the only other asset that looks to some extent what the original Bitcoin stands for. “”
While correlations are widely used to compare two assets in the financial markets, Vinokurov also warns investors to focus on diversifying Bitcoin instead of relying too much on correlation values over different time periods:
“While the correlation between the two has risen fully to 68% recently, the most commonly used 3-month metric is only 15%, while the correlation coefficient equates to a decrease over the longer term like a year. Caution is advised if you use an investment thesis instead based on the metrics above, it may be better to focus on Bitcoin’s diversification potential instead. ”
It is important to note that Bitcoin is largely not tied to all of the major assets available to investors for long periods of time. The correlation with traditional assets is usually between 0.5 and -0.5, which indicates that the relationship between their returns is very weak.
When looking at the correlation numbers, it is important to bear in mind that the two assets ultimately represent separate markets that are impacted by different macro and microeconomic factors. Kohler reinforced this caution with the words:
“It is important to remember that the historical correlation only seems to show how two markets moved or dissolved together, but it does not explain such movements. […] Messages in a single asset (e.g. a BTC fork) do not necessarily have an impact on a gold market. Therefore, the BTC volatility related to this event may not be strongly reflected in the gold market, and the correlations may decrease, and asset returns may become skewed.