Are Bitcoin and Gold Related?

Rage Review : Bitcoin has always been called "digital gold", but does this mean that there are similarities between the two markets? Although media reporters are accustomed to discussing the two together, many experts believe that the relationship between Bitcoin and gold is not that great. This article will use some previous analyses combined with the explanations of several experts to deeply analyze the relationship between these two assets.

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Bitcoin has long been called “digital gold,” but does this mean there are similarities between the two markets?

This relationship has puzzled industry observers as media reports have consistently supported Bitcoin as a new type of "safe haven" asset.

But while some market observers claim there is a link between Bitcoin and gold, those in the digital currency trading community disagree. And, some have collected data that suggests the relationship between the two is speculative at best.

While Bitcoin and gold often exhibit a remarkable relationship during macroeconomic crises, this relationship often breaks down once market conditions return to normal.

Tim Enneking, chairman of cryptocurrency investment management firm EAM, told us: "In reality, when there are regional events that cause everything to move up or down, the correlation between the two is very small."

He also said that in order to meaningfully look at the relationship between Bitcoin and gold, one needs to have a deep understanding of their market correlation: "When the correlation of the entire market is high, the relationship between Bitcoin and gold is large, at least for now. When the correlation of the entire market decreases, the relationship between the two will also weaken."

Petar Zivkovkski, head of operations at bitcoin trading platform Whaleclub, further elaborated that his company has yet to detect a significant relationship between bitcoin and gold from the data.

He said:

"In our view, any relationship between the two, whether direct or inverse, is purely coincidental."

Comments like these may pour cold water on market participants who expect a reliable relationship between the two.

Correlation analysis

The interpretation of the price movements between Bitcoin and gold is open to interpretation, but a deeper look at the relevant market data can help readers better understand these views.

Chris Burniske of ARK Invest gave an analysis of historical market data, but failed to explain the relationship between the two.

Burniske’s analysis revealed a one-year rolling relationship between Bitcoin returns and gold returns when measured weekly from December 30, 2011, to June 20, 2014.

However, during this period, the average correlation was only 0.14, indicating that this is a relatively weak relationship.

A correlation coefficient of 1 indicates that the returns between the two are exactly the same, and a correlation coefficient of 0 indicates that there is no relationship between the two. The current data is 0.14, which is almost close to 0, which means that the relationship between Bitcoin returns and gold returns is very weak.

By June 27, 2014, the one-year rolling relationship between the two became negative, and this state continued until June 24, 2016.

The average correlation during the period was -0.20, again indicating that there was not much relationship between the two.

If the analysis is done on a monthly basis - that is, data is collected on the first Friday of each month, then the correlation from January 6, 2012 to June 6, 2014 is positive.

During this time, the relationship between gold and Bitcoin has weakened again, averaging 0.13.

Starting from July 4, 2014, the data began to show a negative correlation again, and this state remained for most of the time until June 3, 2016.

The relationship strengthened slightly during this period, averaging -0.21.

This degree of correlation is not surprising.

Market size, market dynamics

In explaining the weaker relationship between Bitcoin and gold, market experts also pointed to the different market sizes and market dynamics of the two assets.

Zivkovski described the Bitcoin market as “tiny,” a conclusion drawn from its comparison with the gold market, which means that the demand that drives gold prices up is much greater than the demand that is needed to push up Bitcoin prices.

Max Boonen, founder of market maker B2C2, made a similar statement, telling us that the Bitcoin market is “too small” to be like the older and more established gold market.

Market expert Arthur Hayes, co-founder of Bitcoin leveraged trading platform BitMEX, also said that the popularity of "retail derivatives ETFs (Exchange Traded Fund)" is a factor affecting price changes in the gold market. Currently, there are two Bitcoin-based ETFs awaiting regulatory approval.

Blockchain technology company SolidX announced on July 12 that it has filed a registration statement as government authorities consider an ETF proposed by investors Cameron and Tyler Winklevoss.

Bitcoin adoption grows

While the gold market is larger and more mature than the Bitcoin market, the adoption of the digital currency is increasing.

Joe Lee, founder of derivatives trading platform Magnr, said that the total volume of Bitcoin transactions has increased significantly recently and people's interest in this cryptocurrency is also gradually increasing.

Jacob Eliosoff, an algorithmic trader, told us that as more participants are embracing Bitcoin, its price is also rising, while the gold market is not seeing this movement.

For example, if a large institution adopts Bitcoin, it will affect its price, but there is no reason to think that the development of Bitcoin will affect the gold market.

Jacob Eliosoff

Until then, Eliosoff said, bitcoin prices could be influenced by sizeable technical developments, such as resolving long-standing issues with the way the network handles transaction block size.

“As time goes on, the price becomes more consistent with other fixed-supply commodities, and we’ll see fewer and fewer headlines about Bitcoin,” he predicted. “I’d bet it’ll take many years and see a surge in price.”