Some news sources have been fond of making comparisons between the price action of Bitcoin (BTC) and other assets. Specifically, the two most widely compared asset classes are gold and technology stocks.
When a correlation holds, it tends to be great news. For much of 2022 and early 2023, for example, the “Bitcoin trades in tandem with tech stocks” narrative prevailed. However, since that correlation was broken, there doesn’t seem to be much related news coverage.
Now a new narrative has grabbed the attention: that of the correlation of Bitcoin with gold. Since the bankruptcies of Silvergate, Signature Bank and Silicon Valley Bank in March, both assets have rallied. Both narratives make sense at first glance. If Bitcoin is considered a speculative asset, it could trade similar to tech stocks. And if Bitcoin is more of a safe haven asset, a correlation with gold seems reasonable.
However, it is important to note that correlations can come and go. The fact that two assets share a correlation for a while does not always mean that they share a place in the market in the long term. And when the deadlines are extended, it is possible to rule out any type of correlation.
Let’s examine both correlations on a yearly basis and see if they have any merit.
Bitcoin, Gold, and NASDAQ: One-Year Correlation Analysis
So far this year, Bitcoin has gained roughly 58%, going from $16,600 at the start of the year to over $26,000 today. In the same period, the NASDAQ has gained 36%, going from 11,000 to just over 15,000.
Meanwhile, gold is up just over 7% year to date.
Based on the 90-day correlation coefficient, BTC is positively correlated with gold (0.58) and negatively correlated with tech stocks (-0.65) at the moment. For most 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 technology stocks was slightly less than neutral.
So what is it about? Safe Asset Correlation or Risk Asset Correlation? Or does the presence of multiple correlations indicate that there is no correlation at all? First, does a similar price action on an annual basis constitute a significant relationship between two assets?
The debate could go on for quite some time. These questions are best interpreted rhetorically, that is, they imply that there could be any number of assets that share similar patterns of price action on a one-year chart.
Looking at the question in terms of percentage gains, things are even more different: Gold is up 9%, while Bitcoin is up 18% and the NASDAQ is up 30%.
It would be great if we could extract some meaning from the fact that Bitcoin has a tendency to correlate with the stock market for a while now and then. But so far this year, the relationship between the two has remained constant throughout the banking crisis that began in March and led to a large rally in BTC. Since then, the relationship has disappeared, as the NASDAQ has reached all-time highs and BTC has moved sideways.
In a long enough timeline, it all falls apart.
Over the past 14 years, Bitcoin has appreciated against the US dollar by tens of millions of percentage points. There are few asset classes that can boast similar returns. Other assets are not as volatile either, making a lasting correlation even less likely.
To date, gold has gone from $800 in early 2009 to $1,945 today, a gain of nearly 150%.
The NASDAQ is up more than 10 times since early 2009, which is a return of over 1,000%. Good gains, but far from the 52,000,000% that Bitcoin has made from July 2010 to now.
The main conclusions are:
- An asset that rises more than 50,000,000% over its history may not be correlated with much else.
- Correlations between Bitcoin, gold, and tech stocks don’t typically appreciate for timeframes longer than a year or two.
- Due in large part to the two points above, the correlations do not matter much.
Investors would do well to take this into account when interpreting the markets. Betting on any specific correlation as part of a strategy could be risky, as that correlation could break at any time.
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