Some people in the bitcoin community would love to think of the currency as digital gold on the basis of certain similarities to the physical precious metal they might have observed. Could this digital currency really be the new gold? And is there any correlation at all between bitcoin and gold prices?
For many centuries, people have always turned to gold when there is any form of uncertainty in the economy. It is seen as a good store of value and is almost entirely immune to fluctuations that could cause loss in value. This has contributed to make the yellow metal appealing for many ages.
An interesting recent phenomenon is that more and more people also appear to be looking at bitcoin as a “safe haven” asset, just like gold. For example, when the economy of Cyprus crashed about three years ago, the price of the cryptocurrency surged as people scramble for alternative way of moving money out of the economy. Similar thing was witnessed summer of last year when the Chinese yuan went on a free fall. Following the recent Brexit, the price of bitcoin soared by over $100 as more people try to put their money into the cryptocurrency.
Gold vs. bitcoin
Gold has been in use for about three millennia for diverse purposes. The precious metal is mostly considered as a form of currency or jewelry. It was also used for ornamental and even medicinal purposes in ancient times. The Turks were believed to be the first to use gold and this is recorded to date as far back as 600 B.C. It is today thought of mainly as an investment asset which serves as hedge against volatility in the markets.
On the other hand, bitcoin is a recent introduction first proposed in 2008 by a software developer working under the pseudonym Satoshi Nakamoto. The digital currency was conceived to be independent of a central monetary authority, unlike in the case of fiat money. Participant in the bitcoin community get the cryptocurrency by mining it using open-source software which help solve complex mathematical equations.
Some market observers claim a correlation exists between gold and bitcoin, but others in the cryptocurrency community have denied the existence of such. Significant correlation is usually noticed when there are market crises. However, such a relationship vanishes when normalcy returns to markets.
Correlation assessment with historical data
Chris Burniske of ARK Invest recently tried to prove if there was any strong relationship between gold and bitcoin working with historical market data. He observed that there was positive one-year rolling correlation between bitcoin and gold returns on a weekly basis for the period extending from December 30, 2011 through June 20, 2014. Average correlation during the period was 0.14. The correlation dropped to the negative side on June 27, 2014 and remained there for nearly the entire period from that point through June 24, 2016. During the second period, correlation average was -0.20.
It could be observed from Burniske’s analysis that the relationship between gold and bitcoin was weak. Correlation was not significant enough for any concrete relationship to be established. The strength of relationship (or lack of it) was the same when monthly data was assessed.
Some experts have suggested that difference in market sizes, in part, explains the low correlation between gold and bitcoin. The market for gold is larger than that of bitcoin, although the adoption rate of the cryptocurrency is rising. There are also several gold-based ETFs and retail derivatives products which drive price movements. Two bitcoin-based ETFs are still awaiting regulators’ approval.
Bitcoin prices are expected to go up as more people adopt it. However, there is nothing to suggest that gold prices will increase as well when that happens.