Correlation between Bitcoin and gold in the year 2020 is the largest ever
With the Bitcoin-gold correlation of 76.3%, to date, market analysts again comment on how crucial this correlation is, especially with regard to what it implies. However, what is interesting to note here is that this correlation has been negative for most of the past two years. That is, before the Bitcoin rally on July 27 changed the narrative.
It is very important to address this correlation because, in the eyes of many analysts, correlations are a useful tool in determining the direction of the cryptocurrency’s price movement. While this is under debate, what is not being said is that the price of Bitcoin is determined by a number of factors that include more than just correlation statistics.
For example, leading network analyst Kevin Svenson was one of those who recently tweeted about the correlation between Bitcoin-S & P 500 and Bitcoin-gold.
Basing price predictions on correlation with non-crypto assets may not be the best move, as the Bitcoin-gold correlation before 2018 was negative enough to be dismissed as accidental. A similar correlation can be observed between Bitcoin and technology stocks or stock indices like VIX.
However, in 2020, a positive correlation can be derived from the fact that the Bitcoin price has recovered from the post halving drop and RoI is above 53% in the year. So, although the correlation is evident and applies to the current market cycle, is it relevant? And, if so, for how long?
To determine how long the correlation will remain relevant, it’s important to see why it exists in the first place. Bitcoin and gold are mined and their scarcity leads to an inelastic supply. This is the fundamental basis of correlation, however, it also leads to the consideration of Bitcoin as a “safe store of value”, with a particular focus on “insurance” here.
In reality, Bitcoin is not a “safe” asset. There is volatility associated with it and, despite digital gold or its value storage narrative, it can be argued that it was scalability that drove its value.
In fact, a survey published by the International Review of Financial Analysis revealed that gold plays an important role in the financial markets, with an escape from quality in times of crisis. However, Bitcoin behaves in exactly the opposite way, since it is positively correlated with markets with a downward trend. In addition, Bitcoin is more correlated with other cryptocurrencies during other phases of its market cycle than with gold.
Bitcoin’s correlation with other cryptocurrencies like Ethereum, XRP and Tron is positive and ranges from 40% to 90%, according to Coinmetrics data. The idea behind the talking correlation is to predict the price movement, however, Bitcoin’s price is influenced by several factors in addition to its correlation. That said, it could be argued that it is possible that the correlation with gold could help predict the price at one stage (the accumulation phase) of the Bitcoin market cycle.
There is a Bitcoin-Gold correlation that can be used to assess possible price movements in the post-reduction and accumulation phase of the market cycle. However, BTC’s correlation with other crypto-assets remains stronger and should be preferred for more accurate forecasts.