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Safe bitcoin? Risky gold? BTC correlation with gold hits year high

By Daniela Ešnerová

11:30, 5 October 2022

Bitcoin (BTC) coins and gold
Bitcoin and gold mimicked each other’s trading patterns. -- Shutterstock

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

BTC and gold correlation 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.

ETH/USD

3,494.82 Price
-0.180% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 6.00

XRP/USD

0.61 Price
+0.880% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.01168

BTC/USD

67,451.05 Price
-0.450% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 106.00

SOL/USD

180.34 Price
-1.350% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 2.2652

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.

US real yields and bitcoin (BTC) price correlation.“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.

Markets in this article

BTC/USD
Bitcoin / USD
67451.05 USD
-306.1 -0.450%
Gold
Gold
2407.76 USD
4.34 +0.180%

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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