The truth about the correlation of Bitcoin and Gold

With the Bitcoin-Gold correlation at 76.3%, at the time of writing, market analysts are once again commenting on how crucial this correlation is, especially with regards to what it implies. However, what is interesting to note here is that this correlation was negative for most of the last two years. That is, before the Bitcoin rally on July 27 changed the narrative.

Source: Sesgar

Addressing this correlation is very important because, in the eyes of many analysts, correlations are a useful tool in determining the direction of the cryptocurrency’s price movement. While that is up for debate, what is not is the fact that the price of Bitcoin is determined by a number of factors that include more than just correlation statistics.

For example, top on-chain analyst Kevin Svenson was one of those who recently tweeted about the correlation between Bitcoin-S&P 500 and Bitcoin-Gold.

Basing price predictions on correlation with non-crypto assets may not be the best move, as the Bitcoin-Gold correlation prior to 2018 was negative to the extent that it can be dismissed as incidental. A similar correlation can be seen between Bitcoin and tech stocks or stock indices like VIX.

However, in 2020, a positive correlation can be derived from the fact that the price of Bitcoin has recovered from the post-halving drop and the ROI is above 53% YTD. So while the correlation is obvious and applies to the current market cycle, will it be relevant? And, if so, for how long?

To determine how long the correlation will remain relevant, it is important to determine why it exists in the first place. Both Bitcoin and Gold are mined and their scarcity leads to inelastic supply. This is the fundamental basis of the correlation, however, it also leads to the consideration of Bitcoin as a “safe store of value”, with a particular focus on “safe” here. In reality, Bitcoin is not a “safe” asset. There is volatility associated with it and despite digital gold or its store of value narrative, it could be argued that it is scalability that has driven its value.

In fact, research published by the International review of financial analysis revealed that gold plays an important role in financial markets with the pursuit of quality in times of market distress. However, Bitcoin behaves in the exact opposite way as it positively correlates with downtrend markets. Furthermore, Bitcoin is more correlated with other cryptocurrencies during other phases of its market cycle than with gold.

Bitcoin’s correlation with other cryptocurrencies such as Ethereum, XRP, and Tron is positive, ranging from 40% to 90%, according to data from Coinmetrics. The idea behind talking about correlation is to predict the price movement, however, the price of Bitcoin is influenced by several factors in addition to its correlation. With that said, it could be argued that it is possible that the correlation with gold can help predict the price in one phase (the accumulation phase) of the Bitcoin market cycle.

A Bitcoin-Gold correlation exists and can be used to measure potential price movements in the post-halving and build-up phase of the market cycle. However, the correlation of BTC with other crypto assets is still stronger and should possibly be preferred for more accurate predictions.

This is a machine translation of our English version.

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