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Gold and Bitcoin - is there a correlation?

05 May 2020


There has been a tendency to consider Bitcoin and gold as risk hedging instruments in times of economic and political instability recently. However, the precious metal has already passed the test of time, proving that demand for it is growing during periods of recession or political crises. Meanwhile, the first cryptocurrency has become the cause of the latest crisis in the cryptocurrency market not so long ago, and Bitcoin still needs to prove what it is capable of.

So, twelve years ago, during the previous financial crisis, cryptocurrency simply did not exist yet. Thus, the next crisis will show what to expect from this financial asset. Then it will become clear whether Bitcoin is able to join gold and show itself as a reliable tool for hedging, or a “safe-heaven” financial asset.

During the first years of its existence, cryptocurrencies were independent of traditional financial instruments. The first changes began to occur in 2016, when analysts increasingly began to notice the correlation between the precious metal and bitcoin.

Most likely, this was facilitated by the faster growth in the popularity of cryptocurrency among traders. Before that, bitcoin has been trading chaotically, and there was not enough historical information to see the correlation. There were few traders on the cryptocurrency market, so its trading was more manipulative and did not obey general market rules.

The point in this matter was put by regulators who began to consider bitcoin as a commodity, equating it to gold. Many traders agreed with this definition, moreover, Bitcoin has long been considered "digital gold". We offer to see what are the reasons to consider gold and bitcoin as correlating assets.

Facts are everything

More or less reliable statistics on these assets’ correlation began to appear only last year. It was in 2019 that the correlation between these two trading instruments became apparent. Its cause was the growing tension in the global economy in connection with the trade war between the United States and China.

So, let’s consider the relationship between gold and Bitcoin in examples.

Summer 2019

After a short corrective movement, the quotes of the main cryptocurrency again returned to the level of $10000, and then it has even risen to the resistance level of $12000. At that moment the precious metal strengthened at around $1505. The reason for these changes was the growing tension in trade relations between Washington and Beijing, and both countries were then preparing to introduce new sanctions against each other.

January-March 2020

The Federal Reserve openly says that the US economy has begun to stall. In addition, the conflict between Tehran and Washington intensified, and the coronavirus pandemic COVID-19 has begun in China, and investors started worrying about the fate of the global economy. The upcoming US presidential election has also contributed, raising the level of uncertainty in the world. These events caused the growth in demand for precious metals, as a result it staged a multi-week rally, showing the best dynamics since 2010.

Since the beginning of the year, the price of bitcoin has risen to a local maximum of $10400, and gold has again visited the $1689 area. In March, both assets experienced a serious collapse. So, bitcoin crashed to the support level of $3830, and gold to the level of $1460, and all this happened almost simultaneously.

In these conditions, it is most profitable to trade cryptocurrency with forex brokers, as they offer leverage, trading advisers and analytics, which is not typical of cryptocurrency exchanges.

To summarize

Bloomberg believes that the correlation between gold and Bitcoin is stochastic. So, since the summer of 2018, half of the time, the correlation between these assets was negative. The growth of both assets has occurred simultaneously 21% of the time, and a joint decrease 29% of the time since 2018. But in 2020, the correlation between them intensified. So, both instruments are in tandem 57% of the time.

According to recent studies, Bitcoin has begun to transform into a “safe-heaven” asset. A little further it can become a real protective financial asset, which is especially important in the conditions of the recession that has begun due to the oil crisis and COVID-19 pandemic.

BTC could gain the status of "gold 2.0" by 2030

The Bloomberg agency predicted Bitcoin will see rapid growth soon. For the first time since the beginning of January 2020, a signal about an upcoming market rally appeared on the chart of the first cryptocurrency. Experts refer to the readings of the technical indicator DVAN. The last time DVAN gave a bullish signal in early January, when Bitcoin was trading around $7000. After a month and a half, BTC price was above $10000.

Long-term arguments now play in favor of cryptocurrencies, many of have been strengthened by the coronavirus pandemic. People will begin to invest in “safe-haven” assets after the situation in the world stabilizes, the agency said in a report. In 2020, the first cryptocurrency will be able to secure the status of “digital gold”. Compared to stock market indicators, bitcoin suffered less losses in the previous few months, and this factor accelerates the mass adoption of the asset.

Analysts at Glassnode in their weekly report argue that metrics at the blockchain level confirm the forecast for further Bitcoin price growth. In particular, they indicate a decrease in the number of large transactions and an increase in the number of small transactions, which is a sign of healthy trading activity. In addition, the number of active addresses and users has increased, which also indicates a wider use of the network.

Popular cryptocurrency analyst Tony Weiss believes that soon the first cryptocurrency will see significant growth. He is going to buy BTC if it drops to $6300-$6400. The growth in bitcoin futures trading volumes to the levels before the March 12 collapse indicates an interest in the main cryptocurrency. Galaxy Digital founder, Mike Novogratz, believes Bitcoin could double its value over the next six months. According to the CEO of Social Capital, Chamat Palihapitiya, now is the time for a new phase of Bitcoin’s strengthening. The fall of the traditional financial system will help BTC gain the status of "gold 2.0" by 2030.

Author: Kate Solano for С


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