Gold-Bitcoin Correlation Hits New High
While gold looks to return to its previous highs, analysts have noticed an increasing correlation with Bitcoin, which is also making gains against the troubled US dollar.
Gold and Digital Gold
Often caleld “digital gold”, the decentralised cryptocurrency, which has been a thorn in the side of many traditional investors, has seen renewed momentum with the asset reaching close to $12,000 in recent weeks, whilst howing a surprising correlation with its precious metal counterpart.
Data from analytical firm, Skew have shown the previous monthly average correlation of 60% in the second quarter of 2020, has since been surpassed with a record of correlation of 70%. This, according to Skew, supports the idea that Bitcoin is a store of value, more specifically in times of economic turmoil.
What Does the Gold-Bitcoin Correlation Mean?
When looking at data for two different assets, they will have a correlation between –100% to 100%. A negative correlation means that the two assets behave in the opposite way, (e.g. when asset A goes up, asset B goes down), while a positive correlation means that both assets increase or decrease at the same rate. A correlation of 0 means there is no correlation between the two, where one may go up, while the other may be up, down, or stay the same.
While information on correlations can be useful, they are not an absolute measure. A monthly average may show a different percentage compared to yearly averages. Previous data had shown correlations of around 45-50% when looking at the period between April 2013-December 2019.
Correlation Is NOT Causation
The correlation between the two assets may show an increase in confidence in them, particularly Bitcoin which has been identified in the past as being highly volatile. Linking two assets together on the basis of a correlation is foolish without considering, what underlying factors may be at play. For instance, improvements in crypto tech may increase the price of bitcoin but not necessarily gold, whereas security risks in one asset class may make investors to turn to another.
An increase in correlation between bitcoin and gold will come as welcome news to those in the crypto world, particularly those who see Bitcoin as “digital gold”. Overall, price increases in both assets seem to show further lack of confidence in paper currencies as investors look to protect their wealth as the constant money printing continues. The argument of whether bitcoin is indeed “as good as gold” may continue, but some certainly believe it is better than fiat.
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