Bitcoin’s correlation with gold hits a two-year low, warning investors

Bitcoin's correlation with gold hits a two-year low, warning investors

The Journey of Bitcoin: From Risk Asset to Digital Gold

Bitcoin and Gold

Bitcoin’s correlation with gold has reached a two-year low, reinforcing the notion that Bitcoin is still viewed as a risk-on asset rather than a reliable store of value akin to digital gold. This correlation has been on a downward trend, with recent data indicating a near-perfect negative correlation between Bitcoin and gold. Such levels of divergence were last observed over two years ago, during the aftermath of the FTX collapse.

The correlation between Bitcoin and gold is an essential metric that sheds light on the digital currency’s behavior in relation to traditional safe-haven assets. Bitcoin’s performance during the recent market turbulence further confirms its status as a risk-on asset. The sharp decline in Bitcoin’s value to $15,500 following the FTX collapse, alongside the significant drop in the Nasdaq, demonstrates its vulnerability to market fluctuations.

Despite the ongoing debate on whether Bitcoin can decouple from risk assets in the long term, the current data clearly indicates that this has not yet occurred. Last year’s bear market showcased Bitcoin’s susceptibility to violent drawdowns, debunking the notion of a “supercycle.” In fact, the decline from peak to trough during that period was the fourth-worst in the past decade.

The recent decrease in correlation between Bitcoin and gold coincides with a turbulent period in the crypto markets. Lawsuits against major exchanges, such as Binance and Coinbase, by the SEC, have created uncertainty. However, the impact of these developments has been contained within the crypto markets, without significantly affecting traditional finance markets.

The decoupling of Bitcoin and gold also challenges the theory that Bitcoin has already achieved “hedge” status. While Bitcoin’s price rose during banking concerns in March, it was likely a reflection of market expectations of lower future interest rate hikes rather than a hedge against market risks.

Max Coupland, director of CoinJournal, aptly describes Bitcoin’s correlation with gold as a progress tracker on its path to becoming an uncorrelated store of value. With the correlation at a two-year low, it is evident that Bitcoin remains highly influenced by stock market trends and macroeconomic factors. Investors should be cautious amidst the recent rise in crypto valuations, keeping in mind Bitcoin’s susceptibility to external market forces.

It is important to note that Bitcoin’s history has been closely intertwined with the stock market. Prior to last year’s pullback, Bitcoin experienced an extended bullish run, coinciding with the longest and most explosive bull market in history. However, the recent period of rising interest rates has revealed Bitcoin’s vulnerability as a risk asset. Despite its 80% growth in 2023, Bitcoin remains 56% below its peak from November 2021.

While the economic indicators seem promising, there is a concern that the market may be overly optimistic. Transitioning from a zero-rate environment to a climate where T-bills offer north of 5% returns is a significant challenge. Historical cycles suggest that the stock market tends to experience further pullbacks after the end of rate hikes.

Regardless of the future outcome, the charts clearly indicate that Bitcoin is still considered a risk-on asset. In times of market turmoil, gold is likely to outperform Bitcoin. However, the journey towards achieving digital gold status is ongoing and may change in the future.

In conclusion, Bitcoin’s correlation with gold continues to highlight its status as a risk-on asset rather than a reliable store of value. The recent decrease in correlation emphasizes the long road ahead for Bitcoin to achieve true digital gold status. Investors should remain cautious, considering Bitcoin’s susceptibility to stock market fluctuations and macroeconomic trends. While the current market conditions appear favorable, historical patterns suggest that further pullbacks may be on the horizon. As the journey of Bitcoin unfolds, the numbers don’t lie – Bitcoin is still a risk-on asset.

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