Unraveling the puzzle behind the correlation between Bitcoin and gold

Unraveling The Puzzle Behind The Correlation Between Bitcoin And Gold
Unraveling The Puzzle Behind The Correlation Between Bitcoin And Gold

Trading.resi.co.id – There are many opinions out there claiming that Bitcoin is digital gold. Is this assumption correct? Do both have the same characteristics? Or do the two behave very differently?

This relationship has been discussed by many observers in the cryptocurrency and commodity industries for a long time. The reason is none other than the existence of certain parties who continue to support Bitcoin as a safe haven that can replace gold.

While some market observers claim that there is a correlation between Bitcoin and gold, there are experts in digital currency trading who disagree.

In addition, several people have also collected various data that they believe can show that the relationship between Bitcoin and gold can at least serve as a basis for decision making in speculation.

Differences in expert opinion

Bitcoin and gold often show interesting correlations during markets plagued by turmoil and uncertainty due to high-impact fundamental issues. Some gains and losses between the two assets appear to be inversely related, but the relationship usually disappears once market conditions return to normal.

Tim Enneking, EAM’s chief investment manager, Cryptocurrency, said: “Actually, there is very little correlation when geopolitical events occur that are capable of pushing market prices up or down.”

When the correlation between instruments in the market is high, the relationship between Bitcoin and gold will also strengthen. And conversely, if the correlation in the general market is low, the relationship between Bitcoin and gold will also weaken.

On the other hand, Peter Zivkovkski, COO of the Bitcoin trading platform Whaleclub, stated that his company did not detect a statistically significant correlation between Bitcoin and gold.

Zivkovkski says that “any correlation, positive or negative, between Bitcoin and gold over a period of time is purely coincidental.”

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Bitcoin and Gold Correlation Statistics

Statistical analysis based on historical data conducted by Chris Burniske of ARK Invest fails to describe a strong relationship between Bitcoin and gold.

Burniske’s observations reveal that, when examined weekly, the correlation between Bitcoin and gold circulation over the past year is positive. This correlation was calculated between December 30, 2011 and June 20, 2014.

The correlation between Bitcoin and gold according to the above data yields an average of 0.14. The value of this correlation ranges from 0 to 1. When the value is 1, the correlation value indicates a perfect relationship.

While when it is 0, it means that there is no relationship at all. As the average correlation is 0.14 (close to zero), this could mean that the relationship between Bitcoin and gold is very tenuous.

On June 27, 2014, the one-year correlation between Bitcoin and gold turned negative and remained so for most of the period until June 24, 2016. The average correlation was -0.20 over that period, again failing in representing a strong relationship between the two.

When analyzed on a monthly period (taking data from the first Friday of each month), the correlation is positive for almost all periods between January 6, 2012 to June 6, 2014.

On July 4, 2014, the relationship between Bitcoin and gold became negative, and remained so until June 3, 2016. The relationship between the two assets became slightly stronger in April 2016 (to -0, 21), but at this level, the correlation between the two cannot yet be called significant.

Price Movement Correlation Analysis

The following chart illustrates a comparison of the price movement patterns of Bitcoin (blue line chart) and gold (red line chart):

If you look at the price movements on the weekly time frame, in fact sometime between May 2017 and the end of 2017, there is a one-way correlation between Bitcoin and gold. However, before this correlation almost never happened.

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Likewise, a graph of the price movement between Bitcoin and gold each month below. There was almost no correlation until mid-2017.

Difference between Bitcoin and Gold

When explaining the low correlation between Bitcoin and gold, market experts point to differences in market size and dynamics of the two assets as a reason.

Zivkovsky described the Bitcoin market as still “small” when compared to the gold market. He also emphasized that the demand needed to raise the price of gold was much greater than that needed to strengthen the price of Bitcoin.

Max Boonen, founder and creator of the B2C2 market, made a similar statement, saying that the Bitcoin market still cannot behave like the oldest and most mature gold market.

‘United’ with uncertainty

To know if there will be a correlation between the prices of gold and Bitcoin in 2018, we must first analyze some of the factors that affect the prices of the two assets, before making a projection of the correlation.

Gold prices are influenced by several fundamental news, some of which are inflation rates, monetary policy and the value of the US dollar (Also Read: Factors Affecting Gold Prices). In addition, another strong indicator that has an impact on gold prices is the global factor commonly called uncertainty.

This is where gold’s reputation as a safe-haven asset comes into play, as investors typically choose to ‘shelve’ the value of gold when markets are hit by geopolitical anxiety and instability.

On the other hand, the relatively new Bitcoin market does not yet have a mathematical engine and the price is constantly changing. However, those who monitor cryptocurrency movements have found three main factors driving the price of Bitcoin, namely media coverage, political risk and regulation.

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Markets Insider reports that Google search rates for Bitcoin have a 91% correlation with cryptocurrency prices. However, uncertainty about Brexit and the 2016 US election also contributed to the Bitcoin price surge.

In terms of government policy, Japan’s decision to consider Bitcoin as legal tender led to a 2% increase in the price of Bitcoin in just 24 hours.

Meanwhile, the Chinese government’s move to block all cryptocurrency-related activities managed to bring Bitcoin down by 29% in the same period (24 hours).

So far, the parallel factors influencing the price of gold and Bitcoin are just political risk and uncertainty. These common causes will not be enough to establish a strong enough correlation between gold and Bitcoin, especially if we compare the two markets as a whole.

Conclusion

From some of the above, we can conclude that the correlation between Bitcoin and gold is very small and almost nil, and very unlikely to happen in the near future.

When we look at various highs and lows in the daily time frame of gold and Bitcoin, they seem to have a direct correlation. In a time of geopolitical issues, both are really leaning upwards. But if the problem has subsided, the correlation between the two disappears.

As the experts said above, Bitcoin and gold markets are of different sizes and dynamics, so the relationship between the two assets cannot be called “significant”.

Even with impressive growth in recent years, Bitcoin still has a relatively small market compared to gold. The mechanisms that regulate its growth are also not guaranteed, especially with regard to the implementation of Blockchain technology and a decentralized mining network.

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