Safe bitcoin? Risky gold? BTC correlation with gold hits year high
11:30, 5 October 2022
As the correlation between bitcoin (BTC) and gold hit a year-high, are we witnessing the biggest cryptocurrency finally starting to live up to its “digital gold” narrative?
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Bitcoin (BTC) to US Dollar
‘Digital gold’ theory
Bitcoin’s limited supply, in theory, makes it a possible store of value. The total supply of bitcoins is capped at 21 million, which makes it inherently deflationary. This has lead some to believe that BTC would become a hedge against inflation, though others passionately argue against it.
In a video debate organised by Capital.com, the economist Peter Schiff argued that gold will come out on top as a hedge in an inflationary environment: “To be an inflation hedge, you have to be a store of value, you have to have some underlying value that you’re going to store. Bitcoin doesn’t have a value, it has a price. But you can’t store price. Price is a subject to the market. So Bitcoin is the antithesis of gold, it’s anti-gold.”
But bitcoin's correlation with gold has now reached the highest levels since over a year. Has bitcoin (BTC) really started living up to its value-storing potential after all?
Well, not quite. BTC is down more than 56% year to date. But gold has not been exactly meeting its “safe haven” reputation over the past months of market turmoil either, having fallen 11% in the year to date.
BTC's correlation with gold
Bitcoin's correlation with gold reached the highest levels in over a year at the end of September. – Credit: Kaiko.“Despite core inflation remaining persistently high, gold has failed to act as a safe-haven asset, ie an asset that is expected to retain or gain in value during periods of economic downturn,” a report from the research company Kaiko said. “Over the past year, bitcoin has been mostly uncorrelated with gold, with its correlation oscillating between negative 0.2 and positive 0.2.”
“However, as the US dollar continues strengthening, negatively impacting both crypto and gold, the correlation between the two assets has shifted,” the paper added.
Gold spot price
BTC price and yields
Is the trend likely to continue and can we expect the two to move in tandem?
"The correlation between Bitcoin and gold prices is becoming stronger and the 90-day rolling correlation coefficient increased to 0.81, the highest level in recent years", according to Capital.com's market analyst, Piero Cingari.
However, this is simply a correlation; there is no causal relationship between gold and bitcoin prices.
"The real macro driver behind gold and bitcoin’s trading patterns is simply the US 10-year real yield, which reflects the hawkishness of the Federal Reserve (Fed),” he says. “This is actually a causal-relationship link.” Cingari says as he points out that the rising US riel yields create downward pressure on BTC prices.
“Rising real yields (the left axis is inverted) create downward pressure on BTC prices.” -- Capital.com/TradingView“A Hawkish Fed reduces the incentive to buy gold, destroys the value of tech stocks, and halts the speculation on riskier assets like BTC,” Cingari adds.
“Bad economic news is extremely good news for BTC and gold, as they might ease some pressure on the Fed hiking interest rates. But the big elephant in the room is inflation. A stronger-than-expected inflation print this week will generate further bearish pressures on BTC, gold and US 100. If we don’t see significant reductions in inflation, market hopes for a Fed shift will be definitely crushed,” he warns.
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