Several news outlets have been comparing the price movements of Bitcoin (BTC) to other assets, with gold and tech stocks being the most frequently compared classes.
When there is a correlation, it often becomes a major news topic. For a significant portion of 2022 and early 2023, the narrative was focused on how “Bitcoin trades in sync with tech stocks.” However, this correlation has since faded, with little coverage being given to it.
Now, a new narrative has emerged, discussing Bitcoin’s correlation with gold. Following the setbacks experienced by Silvergate, Signature Bank, and Silicon Valley Bank in March, both Bitcoin and gold have witnessed rallies. These narratives appear logical on the surface — if Bitcoin is viewed as a speculative asset, it may trade similarly to tech stocks, or if it is seen as a safe-haven asset, a correlation with gold makes sense.
It is crucial to understand that correlations can change over time. Just because two assets exhibit a correlation for a period does not necessarily mean they will maintain that relationship in the long run. Looking at larger timeframes, it may be possible to disregard correlations altogether.
Let’s analyze these correlations over a one-year period to evaluate their validity.
Bitcoin, Gold, and Nasdaq: One-Year Correlation Analysis
Since the beginning of the year, Bitcoin has surged by approximately 58%, climbing from $16,600 to over $26,000. Simultaneously, the Nasdaq has seen a gain of around 36%, rising from 11,000 to nearly 15,000.
On the other hand, gold has experienced a modest increase of just over 7% year-to-date.
Based on the 90-day correlation coefficient, BTC currently shows a positive correlation with gold (0.58) and a negative correlation with tech stocks (-0.65). For the majority of this year, BTC has exhibited a high correlation with both assets. Initially, the correlation with gold was strongly negative, whereas the correlation with tech stocks was slightly below neutral.
So, is it a safe-haven correlation or a risk asset correlation? Or do multiple correlations indicate no correlation at all? Can similar price movements on an annual basis establish a significant relationship between two assets?
Addressing these questions would require an elaborate discussion. These queries are best approached rhetorically, suggesting that multiple assets could show similar price patterns on a one-year chart.
When viewed in terms of percentage gains, the differences become more pronounced: gold’s increase is at 9%, while Bitcoin and the Nasdaq have surged by 18% and 30%, respectively.
While it might be interesting to find meaning in Bitcoin’s periodic correlation with equities, the relationship between the two has remained stable for much of this year, even amidst the banking crisis in March that triggered a significant BTC rally. However, since then, this correlation has waned as the Nasdaq reached year-to-date highs and Bitcoin mostly traded sideways.
Eventually, All Correlations Break Down
Over the past 14 years, Bitcoin has seen a remarkable increase against the US dollar by tens of millions of percentage points — a feat few asset classes can match. Other assets lack the same level of volatility, making a lasting correlation even less likely.
During this period, gold has risen from $800 in early 2009 to $1,945, marking a gain of nearly 150%.
As for the Nasdaq, its value has surged by over 10x since early 2009, translating to returns exceeding 1,000%. While these gains are commendable, they are far below the extraordinary 52,000,000% increase that Bitcoin has achieved from July 2010 until now.
Key takeaways from this analysis include:
- An asset that appreciates by over 50,000,000% over its lifespan may not exhibit correlations with many other assets.
- The correlations between Bitcoin, gold, and tech stocks may not be apparent on timeframes longer than a year or two.
- Due to the above points, these correlations lack significant implications.
Investors should bear these considerations in mind when interpreting the market. Relying on any specific correlation as part of an investment strategy can be risky, as such correlations are subject to change without warning.
This article does not offer investment advice or recommendations. Every investment and trading decision carries risks, and readers should conduct their own research before making any decisions.
Image Source: Lukas Gojda / Shutterstock
