New Study Reveals that Correlation Between Bitcoin and Gold Is Not As Strong As Believed

A new study reveals that Bitcoin (BTC) and gold are not as correlated as previously believed. Classification of Bitcoin has been a controversial issue for enthusiasts, investors and regulators with no definite answer so far. It has been viewed as a currency, a commodity, an investment asset, or even as something that has no underlying value. Although, regulators often regarded Bitcoin as a commodity, specifically in relation to gold. Often Bitcoin is called ”new gold” or ”digital gold”.

This week, as tensions between the U.S and Iran aggravated, gold hit its 6-year high, while Bitcoin rose about 20%. Thus, analysts are reviewing the traditional association of commodities and other assets with the price of Bitcoin.

Correlation between Bitcoin and gold prices

Analyzing prices of Bitcoin and gold from April 2013 until December 2019, we can see that Bitcoin reached its maximum in the end of 2017, while gold peaked in 2020. But is there any relation between them?

When computing the correlation of prices we will use a scale, on which 100% will mean full correlation, -100% — full inverse correlation, and 0% — absence of correlation. With this in mind we will state that the prices are 46.5% correlated.

What is particularly interesting is that the correlation increases from 60.3% in 2018 to 70.8% in 2019.

This allows us to assume, that as crypto matures, its price behavior starts to resemble that of traditional assets.

Is there any real correlation?

During the last week the price of gold hit historical high at $1,606 per ounce, increasing futures prices and volatility. In the meantime Bitcoin surged to $8,300 which is the highest price since November 2019.

Furthermore, on January 8, Bitcoin saw its largest volume of daily transactions (over $28 billion) since the price fall of December 18. The Bitcoin’s volatility premium also indicates the highest value on January 8 and 9.

If considered alone, price correlations may motivate investors to conclude, that Bitcoin and gold are related in some way. However, information on prices is not enough for sound conclusions.

Bitcoin and gold returns analyzed

Considering gold and Bitcoin returns on the same time sample, we can see that the correlation between two assets’ prices is much weaker (2.2%), with increase from 2018 (8.7%) to 2019 (12.5%).

The same can be seen when considering lagged returns in 2018 and 2019. Though the correlation here is negative (-4.7% in 2018, -2.3% for full sample), in 2019 it is positive (2.3%). Again, if considered alone, this can allow analysts to conclude, that there is no correlation between Bitcoin and gold.

What about oil, the biggest commodity in the world?

Bitcoin is often seen as a commodity, but when we consider some of its characteristics — fixed supply and high volatility — the traditional classification will be broken when compared to oil.

As tensions between the U.S. and Iran aggravated, WTI oil prices gained 2.86% between January 2 and 7, and Brent Oil prices gained 3.9%. The same happened to oil futures prices.

Analyzing the situation within the same time period as with gold, the relationship between oil (WTI) and Bitcoin price is negative (-13.5%). Unlike previous data, the correlation changes from 2018 to 2019 are negative — 22% in 2018 and -3.7% in 2019.

Talking about returns, we can see the same negative correlation for the full sample (-2.5%) and during 2019 (-3%). Once again, the correlations in 2018 are better than in other periods (1.8%), even though they are not so noticeable.

Considering the lagged WTI returns, we can also see negative correlations in 2018 and 2019 but small positive correlations for the full sample (3%), which is better than the situation with gold returns.

Once again, this data does not allow us to rely on oil prices in predicting Bitcoin price.

So is Bitcoin a commodity, or something else?

The classification of Bitcoin is still debatable. During political unrest Bitcoin, oil and gold behaved alike, when traditional stock indexes such as the S&P 500 and DJIA went in the opposite direction.

However, when a large time period is considered, there is little correlation between Bitcoin and gold and even less with oil. This implies that Bitcoin can not be classified as traditional commodity.

In a long-term perspective Bitcoin proves to be a better investment than gold or oil. In the late December CryptoTheNews shared the report about Bitcoin beating all the securities with unprecedented 296M% ROI.

Still, the factors influencing the price and returns of Bitcoin are unclear. Bitcoin is often viewed as non-correlated, politically neutral asset, which can prove reliable amid economic instability.

Talking about political tensions between the U.S and Iran this week, Nikkei Asian Review states that “free from state interference or geopolitical risk, cryptocurrencies become ‘digital gold’ amid rising Iran tensions”.

If Bitcoin is embraced by a wider range of organizations and individuals, its differences from traditional commodities may become even more obvious. Still, the essence of Bitcoin as a currency, commodity, a speculative asset — or an entirely new asset class — is to be defined.