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Bitcoin Gold Correlation: Solutions for Economic Instability

Both assets are used as safe stores of value - are their fortunes intertwined?

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A possible correlation between the price of Bitcoin (BTC) and that of precious metals, including gold, is playing out in the markets, and has attracted the attention of traders and analysts.

The value of BTC and gold have mirrored one another since the 26th of June. Over the two week period, both assets declined and increased at roughly the same time, suggesting a possible correlation.

BTC Gold Correlation

Speaking to Crypto Briefing, Mati Greenspan,the senior market analyst at eToro, said he noticed the relationship during the last bear cycle. Like Bitcoin, the metal market also sets rough price expectations used as parameters for acceptable price volatility.

However as Greenspan noted, in the same week that BTC dropped beneath $6,000 – considered its floor price – gold also hit a multi-year low, falling to $1250 on the 3rd of July. Late last week, both assets staged a measured recovery, before experiencing sharp price drops in today’s trading.

“Of course this could all be a coincidence”, explained Greenspan. “Market research has previously said there is no correlation between BTC and precious metals and I have not found or been given a plausible explanation yet. However, it is something to note”. 


Why is there a possible Bitcoin / gold correlation?

One of the main attractions of precious metals is that near-universal acceptance has made them useful stores of value. Low-interest rates and yields in the immediate aftermath of the 2008 economic downturn led to the value of gold doubling because markets demanded a stable asset to hold wealth: it may not pay dividends, but it acted as a safe haven for the foreseeable future.

Bitcoin shares similar characteristics to precious metals. Unlike fiat currencies or even other cryptocurrencies, there is no central organization that backs or controls its value: it is completely at the mercy of the free market. A report joint-published by eToro and Imperial College London also argued cryptocurrencies like Bitcoin, were stores of value because they enabled users “to make intemporal choices on when to spend their purchasing power.”

This is still a moot point among financial authorities; the Bank of International Settlements (BIS) argues its value is artificial and fundamentally baseless. That said, in countries that lack stable currencies, such as Venezuela, Iran, and Zimbabwe, popularity among Bitcoin has soared. In Afghanistan, where state currency has almost never been an effective medium of exchange, interest in Bitcoin has increased markedly. 

Similar to cryptocurrency, Greenspan doesn’t see an all-encompassing explanation behind the declining fortunes in the metal markets.

However, one possible suggestion is that negative interest rates last year pushed people to take a risk and invest their savings into either gold or cryptocurrency. Now that rates are beginning to rise again, those same people are converting their savings back into fiat currencies: held in regular bank accounts.

The Genesis block for the BTC network contains a link to an article published in The Times called: “Chancellor on brink of second bailout for banks”. Generally interpreted as a distrust for centralized institutions, it highlights that Bitcoin was created during a time of great economic uncertainty, when the value of fiat currencies, like the dollar, euro or pound, could no longer be taken for granted.

Robert Shiller, who has denounced BTC as a “speculative bubble”, recently said on Bloomberg that its popularity isn’t contained within geographic lines. Economic instability led to the creation of Bitcoin in the first place and has been a principal driver of adoption ever since.

If Bitcoin has a strong correlation with gold, this is possibly because both are stable stores of value, independent of the economic fortunes of one country or central bank.

 

This author is invested in BTC, which is mentioned in this article. 

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