This year, factors such as the global pandemic, financial uncertainty, and the looming election have seen an increase in the Bitcoin correlation to gold and the stock market.
The forex market is renowned as the single most volatile financial entity of its type, and there are several factors that contribute to this. One of the most pressing is the diverse range of macroeconomic factors that impact on currency values, including domestic and international monetary policy.
This has been borne out during the coronavirus pandemic, as governments and central banks have adopted stimulus and quantitative easing measures as a way of capping interest rates and managing inflation.
Increased public spending has also begun to impact on precious metals and stocks, while we’ve also seen a strong correlation between the performance of these assets and Bitcoin. We’ll explore this in the post below while asking what investors should expect going forward.
The Bitcoin price correlation with gold and equities
Historically, Bitcoin (which remains the world’s market-leading cryptocurrency with a total market cap of approximately $193 billion) has enjoyed a loose relationship with other assets.
However, there are signs that this may be changing as the coronavirus continues to grip the financial markets, with the Tickmill research team having previously highlighted a 70% correlation between Bitcoin and gold price declines on multiple occasions. This trend has coincided with the decline of major currencies and their value, and it has become particularly pronounced throughout 2020.
In July, the Bitcoin correlation to gold and stocks had peaked at all-time highs globally, highlighting the growing maturity of the asset and its rate of adoption across a diverse range of markets.
The shift to a correlation with stocks is more recent, though Bitcoin has moved in tandem with gold over the past three months according to data from Digital Asset Data.
“The findings tend to signal that Bitcoin is starting to behave more like a store of value and is potentially being used as a safe-haven asset during global uncertainty in traditional markets,” says Ryan Alfred of Digital Assets Data.
A longer-term view of Bitcoin and Gold shows how closely correlated the Bitcoin and Gold markets have become.
A long term view
The strength of the bitcoin-gold correlation continues to reach new highs, which suggests that a trend shift for the Bitcoin price away from stocks has begun.
From March to July, bitcoin was closely correlated with the S&P 500 and the US stock market, moving up and down in tandem as the pandemic pushed prices down and government interventions pushed equities up. The ever-strengthening correlation between gold and bitcoin demonstrates Bitcoin’s growing status as a safe haven asset.
With a growing awareness that today’s global macroeconomic outlook is being maintained by central bank money printing policies, gold has performed well as a hedge against inflation and the risk of a pandemic induced crash.
Last month business intelligence company MicroStrategy announced its adoption of Bitcoin (BTC) as its primary reserve asset. In a press release, MicroStrategy said it had purchased 21,454 BTC for $250 million.
Michael J. Saylor, the CEO of MicroStrategy stated, “This investment reflects our belief that Bitcoin, as the world’s most widely-adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash.” Grayscale Investment, a leading cryptocurrency asset manager, also increased its Bitcoin position by a sizeable 17,100 BTC in late September.
As other investors reach similar conclusions, the narrative that Bitcoin is digital gold for the digital world will likely strengthen further.
However, the above is only true in the context of a long term, multi-year time horizon. In the immediate short term, all markets face significant headwinds with the ongoing pandemic turmoil and the U.S. election the potential stumbling blocks that must be traversed next.