At the time of writing, the BTC/USDT pair is trading at 9508.20 on CoinDCX’s platform. With a circulating supply of 18,440,025 BTC the market capitalization of Bitcoin according to CoinMarketCap is north of $175 billion.
Bitcoin is said to be the digital gold in the asset world and is often compared with gold in terms of being a safe haven. In our article on Bitcoin acting as a hedge against inflation, we had seen how Bitcoin has been performing against all odds this year. Despite the downfall and the poor performance of the stock market and the commodity markets, Bitcoin can be seen as a hedge against inflation which means that it could act as an excellent store of value.
Bitcoin price had been consolidating for over 2 months now till a recent break in price that happened yesterday when gold prices escalated. This made us wonder if the correlation between gold and Bitcoin was for real. This report aims to find out the current state of gold and Bitcoin’s correlation and what it could mean to the people.
Recent analytics provided by Skew, indicates how closely the market price of Gold and Bitcoin has been moving over the past year. While Bitcoin has been more volatile than gold, we can see instances of very high correlation between the two. These can be spotted around mid March when both the markets crashed. Bitcoin was trading at around $4.9k whereas gold was trading at $1.6k. The next one is yesterday’s breakout in both the markets.
Gold and Bitcoin prices have been rising since the market selloff that happened towards the end of February, 2020 due to the spread of the COVID — 19 virus. Let us now see how the correlation between them has changed in the past year.
The graph above shows correlation for two time frames. While the yearly correlation does not show much relationship between the two assets, monthly correlation has been fluctuating and high at some points. It was the highest at 55.8% on the same day when both markets crashed in mid March. Gold and Bitcoin do not always move in the same direction. There have been times when both moved in the opposite direction and this can be captured by the negative correlation see in the graph. Recently, their correlation shot up from 12% to 40% in a matter of two days.
Last two year’s data for both markets even suggest that they have not moved in sync with each other throughout the period. This year has been an exceptional year in terms of correlation between the two asset classes. Not only did monthly correlation, but annual correlation also rose to its all time high. This brought us into thinking about Bitcoin’s correlation with the stock market as well.
Clearly, both markets have been negatively correlated with each other except for the exceptional rise in correlation that has happened since May, 2020.
Our Analysis
People have always considered gold to be a safe haven and a great store of value. Whenever there has been a crisis, be it the Great Depression, a pandemic or the demonetisation in India, people have rushed to buy gold. This causes its price to rise.
People are getting more and more skeptical each day with growing concerns about the global economy and a cure for the COVID — 19 virus. This must have led to an increase in demand for gold as a hedge against stock market volatility. Not only gold but Bitcoin’s price also went up. Due to the reduced faith in the stock markets, people have taken out their money from the stock market causing the prices of the stocks to fall and at the same time invested more and more in other asset classes like gold and cryptocurrencies. The rise in price of Bitcoin only means that more people are placing their bets on it as a hedge against inflation and volatility and as a great store of value. This has been due to Bitcoin’s specialities which include decentralization, security, liquidity, rarity and much more.
To conclude, the COVID-19 outbreak has only ensured a stronger correlation between gold and Bitcoin. Investors and traders who earlier had doubts about cryptocurrencies and only purchased gold as a store of value can therefore consider Bitcoin as a safe haven after doing their own research.
