Gold's Correlation with Bitcoin Reaches a New High

Both gold and the “digital gold” still maintain a moderately strong relationship.

Gold's Correlation with Bitcoin Reaches a New High

“Bitcoin is still early in its maturity curve to be firmly placed in the category of ‘digital gold,’” – Vice president of corporate development at cryptocurrency exchange Luno, Vijay Ayyar, told CNBC.

The decline in Bitcoin's tendency to move in tandem with U.S. stocks has refocused analysts' attention on a correlation that is rapidly developing: bitcoin's relationship with gold.

A recent trend in integrating the two assets is to move away from stock prices, which have declined significantly in the past year, and to support arguments by bitcoin evangelists that so-called digital gold offers the same safe-haven advantages as the real thing. However, the correlation remains only mildly strong, leaving open the question of whether BTC and gold will continue to move in tandem.

“We could be seeing a slight decoupling of crypto and equity markets, which is reflected in BTC's rising correlation with gold,” according to Kaiko's head of research, Clara Medalie.

In recent days, bitcoin traded just above $20,000, up nearly 3% over the past seven days, while gold was changing hands at $1,700, up over 3%.

As cryptocurrencies decoupled from equities, their 30-day correlation reached over 0.3 last week, the highest in over a year, according to Kaiko. Since late last year, the correlation between gold and bitcoin has fluctuated between positive and negative 0.2.

Generally, 0.3 indicates a slightly positive correlation, 0.5 indicates a moderately strong correlation, and negative numbers indicate a weak correlation.

As a matter of fact, bitcoin has fallen considerably more steeply than gold this year. As a result of Russia's unprovoked attack on Ukraine and the economic fallout in late winter and into spring, the crypto market had also been swept up in an angst-induced sell-off, according to Medalie.

Nonetheless, the decoupling gradually waned as investors sought stable ground to avoid the wider economic volatility of this year. Advocates of Bitcoin have long argued that the asset can serve as a financial hedge during economic turmoil - similar to gold, which investors have historically valued as being able to hold its value.

At this stage, investors are no longer X-raying the advantages of one hedge against inflation against another, but rather, they just want a better alternative to keep their funds at a time when fiat has proven to be more unstable,” -- Fitburn co-founder Alexander Meurer told CoinDesk.

It was noted by Kaiko that crypto markets performed better than traditional assets in the third quarter, especially bitcoin, which fell by approximately 1 percent during the period. In contrast, the S&P 500 declined 5%, the Dow Jones Industrial Average (DJIA) fell 6%, and the Nasdaq plummeted 4%.

In his opinion, it is still too early to determine whether the current correlation between BTC and gold will strengthen or weaken over time. He attributes the current weak positive correlation to bitcoin's low volatility. As the world grapples with high inflation, central bank hawkishness, and the threat of recession, Bitcoin has traded in a narrow $19,000-$22,000 band for much of the past two months. This is indicative of investors' caution in their strategies.

As the U.S. dollar strengthens amid tighter monetary policy, Charlie Morris, chief investment officer at ByteTree Asset Management, expects the correlation between gold and bitcoin to remain “higher than usual”.

“The dollar hasn’t been this pricey (on purchasing power parities valuation) since 1985, and at some point, the Fed will cool off,” he stated. “When that happens, both bitcoin and gold will respond well. Just as a strong dollar caused them pain, a weak dollar will bring relief.”

Morris anticipates that “by mid-2023, or perhaps sooner, the dollar is no longer the story,” resulting in a low or negative correlation between gold and bitcoin.

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