Some news sources like to compare Bitcoin (BTC) price movements with those of other assets. In particular, his two most commonly compared asset classes are gold and tech stocks.
Correlations exist, but they tend to be big news. For example, from much of 2022 to early 2023, the theory circulated that Bitcoin will trade alongside tech stocks. However, it seems that there are not many related reports because the correlation has collapsed.
A new story is now in the spotlight. That’s the correlation between Bitcoin and gold. Both assets have been on the rise since the failures of Silvergate, Signature Bank and Silicon Valley Bank in March. Both of these stories make sense on the surface. If you consider bitcoin a speculative asset, it could trade like tech stocks. And given that Bitcoin is the safer asset, the correlation with gold seems reasonable.
However, it is important to note that correlations can come and go. Just because two assets share correlations temporarily does not necessarily mean they will share market positions over time. Also, zooming out to a larger timeframe could potentially filter out any kind of correlation.
Let’s examine both of these correlations on a one-year basis and see if there is any benefit.
Bitcoin, Gold and NASDAQ: One Year Correlation Analysis
Year-to-date, bitcoin is up about 58%, from $16,600 at the start of the year to over $26,000 today. Over the same time frame, the Nasdaq rose about 36%, from 11,000 to just over 15,000.
Gold, on the other hand, is up just over 7% year-to-date.
According to the 90-day correlation coefficient, BTC is currently positively correlated with gold (0.58) and negatively correlated with tech stocks (-0.65). For much of this year, BTC has been highly correlated with both assets. At the beginning of the year, the correlation with gold was very negative, while the correlation with tech stocks was slightly below neutral.
So which one is it? Is it a safe asset correlation or a risky asset correlation? Or does the presence of multiple correlations imply no correlation at all? Do price movements constitute a significant relationship between the two assets?
Such discussions can get very long. These questions are best interpreted on a rhetorical basis. This suggests that there can be any number of assets that share similar price movement patterns on a one-year chart.
Looking at this question from a lift perspective, the situation looks even different. Gold is up 9%, Bitcoin is up 18% and Nasdaq is up 30%.
Hopefully, some reading of significance can be gleaned from the fact that Bitcoin tends to correlate with equities at times. So far this year, however, the relationship has remained unchanged during the banking crisis that began in March, leading to a massive rally in Bitcoin. Since then, the relationship has vanished as the Nasdaq has rebounded to year-to-date highs and BTC has traded almost flat.
In a long enough timeline everything falls apart
Over the past 14 years, Bitcoin has gained tens of millions of percentage points against the US dollar. Few asset classes boast similar returns. No other asset has similar volatility, making long-term correlation even less likely.
To date, gold has risen from $800 in early 2009 to $1,945 today, an increase of almost 150%.
The NASDAQ has risen more than 10x since early 2009, with a return of over 1,000%. A nice profit, but nowhere near the 52,000,000% Bitcoin has returned. July 2010 to present.
The key points here are:
- Assets that grow by 50,000,000% or more over a lifetime are likely to be poorly correlated with other assets.
- Correlations between Bitcoin, gold, and tech stocks are often not seen over timeframes beyond one or two years.
- Correlation is not very important, mainly because of the previous two points.
Investors should keep this in mind when interpreting the market. Relying on a particular correlation as part of a strategy can be dangerous because that correlation can break at any moment.
This article does not contain investment advice or recommendations. Any investment or trading move involves risk and readers should conduct their own research before making any decision.
This article is for general informational purposes and is not intended, nor should it be taken as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views or opinions of Cointelegraph.
