18th Dec 2020

What You Should Know About the Correlation Between Bitcoin and Gold

Article Table of Contents:

Bitcoin – The New Gold?
The Correlation

It has been an amazing year for Bitcoin, the king of cryptos. After stumbling at the start of the year, the cryptocurrency with the largest market cap has been on a dominant march. In March 2020, Bitcoin was below the $5,000 mark. Since then, BTC USD has been rising, albeit with volatility. On July 27, 2020, it had crossed $10,000, breaching the $12,000 level twice by August.

But this was not the end of the upward movement. On November 30, BTC was valued at $19,850.11, setting a new record high. The year has been good for gold as well. After starting the year below $1,600, gold hit $2,000 per ounce in August 2020. This was the first time the precious had reached this level in history. Although the price dropped slightly after that, it still remained around the $1,900 mark.
Bitcoin and gold are similar, in that both are viewed as safe haven assets. One of the main reasons for this is the low correlation with other assets, such as stocks, indices and currencies. Till 1971, gold used to be tied to the US dollar. But the then US President, Richard Nixon, cut the ties between gold, as a base, and the US dollar. Bitcoin also shows little correlation to traditional asset classes. In fact, between 2012 and 2020, the correlation between Bitcoin and most traditional assets, such as equity indices and bonds, stood between -0.1 and 0.1. 

The other common factor between the two assets is the rarity. There is a limited quantity of gold present in the Earth’s crust. Plus, it requires huge resources to mine and process, making it scarce. This means gold cannot be manufactured like the central banks print money or new shares are issued by a company. 

Bitcoin is also a scarce resource. The supply of Bitcoins was limited to a total supply of 21 million tokens by its creator, Satoshi Nakamoto. There is also the halving of the mining reward of Bitcoin, which cuts the reward by half every four years. This ensures that that market is not flooded with Bitcoins. In fact, the last Bitcoin is expected to be mined in 2140. 

Bitcoin is also similar to gold in the sense that it is not issued by the government or central bank of a nation. It is a decentralised cryptocurrency, unaffected by geo-political and economic factors that impact the value of traditional assets. Also, both gold and Bitcoin are impacted by the value of the greenback, as their prices are expressed in terms of the US dollar (Gold as XAU/USD and Bitcoin as BTC/USD). 

The Correlation

With so many similarities between gold and Bitcoin, some correlation is only to be expected between the two. The correlation was weaker a few years ago, when Bitcoin had not yet established itself as a safe haven asset. But the correlation has strengthened in 2020. Driven by the relentless printing of fiat currencies to keep economies afloat during the Covid-19 pandemic, both gold and Bitcoin have risen sharply. They have also seen price declines each time market sentiment regarding the economic future turned positive. 

In August 2020, when Russia announced the approval of a vaccine for the novel coronavirus, both assets experienced substantial declines. Gold fell 4.7% to $1,932 per ounce, the worst single day decline in seven years. Bitcoin also dropped 3.9% to around $11,200. In fact, the monthly average correlation between gold and Bitcoin was 0.7 in August 2020, an all-time high. In comparison, between December 30, 2011, and June 20, 2014, the correlation between the two assets was a mere 0.14. This reflected an extremely weak relationship. 

With Bitcoin establishing its position as a safe haven asset, the correlation between gold and the cryptocurrency is becoming stronger. However, before taking a position whether as Bitcoin or CFD, be sure to not rely on this correlation alone. Conduct thorough market research and use the right risk management tools to open a trading position.  

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