important point

  • Bitcoin-Gold Correlation Now At Lowest Level Since FTX Collapse In November
  • Our head of research writes that bitcoin may one day become a store of value, but the numbers are currently trading like an extreme risk-on asset.
  • Bitcoin lost 76% of its value as risk assets fell as central banks around the world tightened monetary policy amid an inflationary crisis.
  • Gold, meanwhile, has remained flat and is now nearing an all-time high.
  • Correlation between Bitcoin and growth stocks and riskier sectors of the equity market remains tight

One of the ultimate bullish scenarios for Bitcoin is the transformation of Bitcoin into some kind of digital gold.

For some reason, mankind has been obsessed with this strange, glowing metal for thousands of years. Going back even further, there is concrete evidence that gold was not only a part of everyday life and mythology, but also an important symbol of wealth in ancient Egypt as far back as 3000 BC.

Bitcoin, on the other hand, did not exist in ancient Egypt. It didn’t exist in the Middle Ages, the Great Depression of the early 20th century, world wars (yet?), the inflation and energy crises of the 1970s, and most of the 2008 subprime crisis.

In fact, Bitcoin was launched in January 2009 and the genesis block was mined just two months before the stock market bottomed out. Over the next 12 years, the stock market not only recovered, but completely collapsed. Between its trough in 2009 and its peak at the end of 2021, the S&P 500 has multiplied sevenfold and the Nasdaq surged nearly 13x. In other words, Bitcoin entered one of the most explosive and longest bull markets in history. Until 2022, it knew nothing But underground level interest rates and a rising only market.

Gold’s hedging properties are what Bitcoin wants

In 2022, risky assets were sold. The Nasdaq has lost a third of its value. The S&P 500 is down his 20%. Bitcoin has seen big drops before, but don’t get me wrong, this is the first time Bitcoin has faced an economy-wide bear market.

Despite Some Enthusiasts Claiming Bitcoin Can Act as a Hedging Asset, This Actually Was no break out. By the end of 2022, Bitcoin has fallen 76% from its all-time high. Assets were being crushed amid the most explosive inflationary environment since the 1970s and Bitcoin’s first bear market. There was no room for discussion. Bitcoin was trading like a risk-on asset. And it continues today.

That doesn’t mean the narrative could flip in the future. Personally, I think that’s the positive side of Bitcoin. In other words, it is a store of value similar to gold. However, while it is debatable whether that will ever happen, it is clear that Bitcoin now trades like a risk-on asset. To borrow a word from Kevin Bacon’s absolute classic, these are the facts of the case and the undisputed ones. few good people.

Gold, on the other hand, will remain flat through 2022 and is currently trading near record highs.

Bitcoin-Gold Correlation Plunges

The correlation between gold and Bitcoin is particularly interesting to follow for all the reasons explained above. I used the 60-day Pearson index and plotted it in the chart below.

The last month immediately pops up. At the beginning of June the correlation was a near-perfect 0.86 and has been around this level since late April. And fell. It is currently at 0.16, the lowest level since FTX collapsed in November and the cryptocurrency market suffered a downturn. but why?

Well, I’m not sure. That’s kind of the gist. Bitcoin is on the rise at the moment, although that tends to be the case from time to time. Perhaps this is due to news that asset managers BlackRock and Fidelity have filed for ETFs, but maybe Bitcoin is the only one doing it. Perhaps it is simply rebounding from the plunge following the back-to-back Binance and Coinbase lawsuit announcements two weeks ago.

However, if we extend the time period of the previous graph, we can see that the correlation between gold and Bitcoin fluctuates significantly.

It’s hard to apply any pattern to it, to say the least. I thought I’d try a different metric, so instead of his 60 days he used Pearson’s 90 days in the following graph. As expected, the trend fluctuates less, but still doesn’t seem to have a meaningful relationship.

I think it is very clear that evaluating the correlation coefficient directly proves that no positive relationship exists between these two assets.

Fed holds the key

In fact, I believe this says more about gold than bitcoin. Gold is in a strange place right now, and is more dependent on expectations of how inflation and interest rates will move than it currently is. The correlation between gold and the stock market is therefore higher than typically seen in the past. This is why gold often rises when weak CPI numbers are released or when dovish Fed comments on interest rate policy surface.

If you step back and look at the big picture, it’s really not that complicated. From $68,000 in November 2021, when money was cheap and risky assets were trading at exorbitant valuations, Bitcoin has seen the fastest rising cycle in recent memory and the worst inflationary crisis in 50 years. The price fell to $15,500 in November last year, seven months after it began. The price then doubled to $30,000 as inflation fell and expectations about the length of the rate hike cycle faded.

Along with all the fakeouts and reverberations in between, it’s been a huge number of moves and clearly trades like an extreme risk asset. Gold, on the other hand, has much lower volatility and over the last three years he has been relatively range bound between $1,600 and $2,000.

Again, bitcoin may one day seize the throne of uncorrelated assets, or portfolio inflation hedging, but that is clearly not the case today. The chart below, which is the easiest way to illustrate this, plots Bitcoin’s close relationship with the tech-rich Nasdaq Composite Index since the economy moved into this risk-off period of monetary tightening. increase.

Bitcoin’s rally during the banking crisis a few months ago prompted some to declare it disconnected from the world of risk assets and fiat currencies.for me I have written At the time, this was just wishful thinking. On the contrary, it overturned expectations that the Fed would not be able to raise rates as aggressively in the future if the banks failed because of the cost of these rate hikes (indeed, a correlation soon became apparent). stood up).

The recent decline in its correlation with gold is similar, retreating from a six-week high of around 0.86. There is nothing ambiguous about the situation at this time. Bitcoin trades like a risk-on asset. Maybe one day I’ll have the coveted Digital Gold title, but I’m nowhere near that right now.

By Jules

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