Digital Gold? Bitcoin’s Correlation With Gold Reaches Yearly Highs

News / 07.10.2022

Living up to its reputation as “digital gold”, Bitcoin’s correlation with the physical commodity appears to actually be rising over recent weeks. 

The correlation coefficient between both assets hit a yearly high of 0.4 last week – its highest point in over a year. 

“Digital Gold” Coming True?

As noted by the crypto market data provider Kaiko, Bitcoin’s correlation with gold since last year has oscillated between positive 0.2 and negative 0.2. In other words, the movements of one asset did little to predict those of the other. 

However, that trend has changed as the Federal Reserve’s tightening monetary policy starts to weigh on markets. 

“As the U.S. Dollar continues strengthening, negatively impacting both crypto and gold, the correlation between the two assets has shifted,” explained the firm. 

Bitcoin’s Correlation to Gold. Source: Kaiko

Bitcoin experienced a stark collapse in June on the heels of tight monetary policy, record-high inflation, and industry-wide contagion in the wake of Three Arrows Capital’s collapse. Aside from crypto market excitement at the time of the merge, Bitcoin has seen little volatility since then. 

Interestingly, that small amount of volatility gave it relative strength compared to other assets – such as stocks – in Q3. Bloomberg’s indexes showed last week that it was the best-performing asset of the quarter, next to the dollar. 

Gold has also mostly fallen over the last few months, dropping from roughly $2000 in March down to $1,712 at writing time. 

On Wednesday, Bloomberg Intelligence released a report suggesting that Bitcoin may be transitioning into more of a “safe-haven” asset. However, it also predicted that Bitcoin will outperform most other assets, including stocks, when the “economic tide turns.”

Yet that may not come for a while. Federal Reserve governor Philip Jefferson explained on Tuesday that the central bank remains firmly committed to tightening rates until inflation comes down. 

Why the Comparison?

Bitcoin is thought to have the potential to succeed gold as the “sound money” of the 21st century. This is due to its scarcity which rivals that of gold, combined with its portability and divisibility that makes it easier to transact with. 

Overall, the limited supply of both assets has given them a reputation as inflation hedge assets, immune to fiat currency-style debasement.  However, even as inflation swelled in 2022, both assets have stayed flat, if not declined in value. 

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Wayne is a Blockchain enthusiast and expert in crypto trading. Currently, he covers trendy issues on digital currencies.