Is the correlation between Bitcoin and gold still relevant in 2021?

[ad_1]

HodlX guest message Submit your message

The gold vs. Bitcoin debate gained momentum last month as US inflation hit three decade highs. Globally, consumer prices have accelerated at an unprecedented rate, prompting investors to seek hedge against inflation and gold bugs and Bitcoin fans are arguing over which asset is the best store of value.

I’ll give an overview of what these two assets have in common and how they differ, as well as examine their correlation.

How are gold and Bitcoin similar?

Limited supply

Bitcoin and gold derive their value from limited supply and growing consumer demand during times of heightened consumer price pressure. Gold is limited in supply, as is Bitcoin, which is expected to run out by 2140.

Means of exchange

Bitcoin and gold can both be exchanged for goods and services. However, to become a functioning medium of exchange, Bitcoin must first establish itself firmly as a store of value. In other words, before people want to use Bitcoin for their daily transactions, they have to want to be paid in Bitcoin and keep their BTC balances.

Safe haven call

Gold and precious metals are viewed as a safe haven by investors in uncertain times because they are not regulated by the government. Like gold, Bitcoin is independent of any single system.

Gold prices have historically performed well during periods of high inflation. But the performance of the precious metal this year is nothing compared to Bitcoin. So, BTC has risen over 80% so far this year, while gold has lost around 5%. In October, bullion added just 1.5%, while the flagship cryptocurrency rose nearly 40% during the same period.

Source: TradingView

The chart below divides the price of Bitcoin by the price of gold and shows how many ounces of gold are needed to buy a single Bitcoin. Bitcoin outperforms gold when the ratio increases, and gold outperforms Bitcoin when the ratio decreases.

Source: Longtermtrends.net

How is Bitcoin different from gold?

Gold is less volatile than Bitcoin, so that’s probably the biggest argument in its favor. It is popular among investors in times of economic downturn. The precious metal has a strong track record of price stability, which is why.

Going forward, the presence of institutional investors in the crypto market could mitigate its volatility and smooth out market dynamics. I think at some point extreme volatility will no longer be the case for crypto.

There are many advantages to owning, trading, buying and selling Bitcoin over gold, and it’s cheaper and easier to keep BTC safe, while gold is a difficult asset to manage. Physical gold is scarce. Paper gold remains a bit of a concern. US gold stocks are highly rated. Meanwhile, Bitcoin is just one click away, so it’s no wonder people looking for shelter are going straight to cryptocurrency.

Measuring the correlation of Bitcoin with gold

To calculate the correlation coefficient, I compared the periodic daily returns of the two assets since early October 2021 as you can see on the chart. The cross-correlation coefficient stands at 0.24, which means that Bitcoin and gold are positively correlated, although this correlation is somewhat weak. The closer the cross-correlation value is to 1, the more identical the assets.

At the end of the line

Previously, gold and Bitcoin had a negative correlation or no relationship at all, but current trends indicate that the two assets are starting to move in common to some extent in terms of their perceived value as hedges against inflation.

Crypto adoption continues to grow exponentially and Bitcoin’s yields continue to outpace gold, so it’s only volatility that keeps it from becoming a mainstream mainstream asset. The volatile nature of Bitcoin – as well as its steady increase over time – is both what scares and attracts people.

If Bitcoin were less volatile and let’s say a $ 10 hike was extraordinary for it, as it is with fiat currencies and precious metals, then mass adoption would be inevitable. We would no longer need fiat currencies, but rather low volatility and predictable cryptocurrency. It might not be Bitcoin – but an improved version of Solana or another next-gen crypto that would be adopted the most.

In today’s crypto market, unknown tokens can go from zero to billions of market cap in a matter of months. It is an opportunity that people are increasingly willing to take advantage of.

It is clear that there are more players in the market now, and they understand that the BTC rally will not last forever. Either it would lose vapor and become less volatile, or it would burst like a bubble. A Bitcoin worth $ 1,000 billion sounds crazy. In this scenario, whales would be the richest people on the planet, so what about the rest of the population? From the point of view of the world economy and the future world order, this makes no sense. Moreover, no government authority would allow such a thing to happen.

Therefore, Bitcoin would lose either volatility (which is hard to imagine) or interest (even more unlikely). It could take another form as well – or maybe we’ll have yet another crypto that is linked to sustainability and environmental friendliness, as this is a global trend right now.

While Bitcoin is still a volatile asset, it is likely to face other assets in the medium to high risk investment segment in the coming years. Therefore, if you do your own research and limit your investment to what you are comfortable losing, it can be very profitable. Additionally, cryptocurrency enthusiasts keen to dig deeper can find a variety of promising altcoins that have the potential to generate good profits.

Mike Ermolaev is Public Relations Manager at ChangeNOW and Expert Author at CoinTelegraph, Investing.com, FXStreet, Benzinga and others. He has been working in crypto public relations since 2018, being CCO in several leading crypto entities and co-founder of his own communications agency before joining the ChangeNOW team.

Check out the latest titles on HodlX

Follow us on Twitter Facebook Telegram

Check out the latest industry announcements Disclaimer: Opinions expressed in The Daily Hodl are not investment advice. Investors should do their due diligence before making high risk investments in Bitcoin, cryptocurrency, or digital assets. Please note that your transfers and transactions are at your own risk and that any loss you may incur is your responsibility. The Daily Hodl does not recommend buying or selling cryptocurrencies or digital assets, nor is The Daily Hodl an investment advisor. Please note that The Daily Hodl participates in Affiliate Marketing.

Featured Image: Shutterstock / T. Winand Photography

[ad_2]