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The correlation of gold to the cryptocurrency market

The correlation of gold to the cryptocurrency market

 

Gold has been one of the most important means of storing value since the beginning of modern history. The gold sector remains largely unchanged for the past 200 years. When it comes to investing and trading, cryptocurrencies are on everyone’s mind these days. The cryptocurrency market is easy to invest in, yet so volatile. To put it into perspective, the gold market at its peak was worth $7.9 trillion, while that of cryptocurrency was $800 billion.   Most cryptocurrencies have a fixed number of tokens in circulation, and the price of a cryptocurrency is dependent on its supply and demand.

If an investor was to buy or sell $500 million worth of gold, it would create a mere ripple in the gold market, while if the same were to ensue in the cryptocurrency market, the market would destabilize and crash. Nevertheless, interesting developments have been taking place over the past few years and there is a correlation between the cryptocurrency market and that of gold, with cryptocurrency proving to be a suitable alternative to gold and fiat currency.

Bitcoin-gold price correlation

While there has been an interesting spread between the correlation of gold and bitcoin prices over the last year, this does not necessarily indicate that either variable is influencing or causing a rise or dip in value of the other. Often referred to as “Digital Gold”, there does seem to be a strong correlation between bitcoin and gold, more so than bitcoin with altcoins.

According to Bitstamp data, gold was selling at $1,200 on the 13th of November, 2018 and was almost touching $1,300 by the end of December. This coincided with bitcoin falling from $6,200 to $3,122 in the same period. Gold fell below $1,300 in March, 2019. Two days after gold fell below this mark, the price of bitcoin surged to a five-month high of $5,662.

According to a report published by Bloomberg in August 2019, the correlation between bitcoin and gold has doubled (almost) over the past three months (May-July 19’). The correlation value stood at 0.496 over the past year, while during May-July 19’, it has moved up to 0.827. The perfect correlation stands at 1, the figure being closer to that number than far from it. To put it into perspective, according to research, in these three months, the two assets moved in tandem 58% of the time! As of the 30th of September 2019, gold is selling at a high of $1,494, while the price of bitcoin has dipped to $7,813. The data indicates that there is indeed a strong correlation between the rise and fall of the price of these commodities, yet we cannot definitely attribute either of the two to influence the others gain or loss in value.

Photo Credit - @pixabay

Bitcoin could serve as a replacement for gold

In a bitcoin summit in Israel, Nick Szabo said,

Central banks will end up using bitcoin as a reserve currency.” "I think it will be one of the many reserve currencies that can be used to underpin value on other things. There doesn't have to be only one anymore."

In an interview with MarketWatch, Kristoffer Inton said,

If cryptocurrency were to displace gold’s investment case, the implications for gold prices would be devastating. 40% of gold demand relates to investment, so a shift in investment from gold to cryptocurrency would be a seismic shock.”

The repercussions of this event taking place would send shockwaves across the global economy! According to Felix Hartmann from the cryptocurrency hedge fund, Hartmann Capital,

Bitcoin bridges the gap between currency and a store of value asset. It maintains the speed and flexibility of fiat currency while remaining independent of central banks and governments and their macro-economic policies such as inflation.”

Gold-pegged stablecoins

2018 witnessed the “stablecoin frenzy”, with a large number of new cryptocurrencies entering the market. There was a significant downfall impacting ICOs, as they proved to be unreliable, leading to the rise of stablecoins. Of the many stablecoins that rose from this frenzy, gold-pegged stablecoins emerged. Novem pegged their stablecoin to coin, and according to reports, the company has 35 kg’s of LBMA-certified fold securely stored by Loomis International.

To put it into perspective, that is about $1,500,000 of gold in collateral. The stablecoin frenzy may indeed lead to the flourishing of gold-pegged stablecoins, as value is delivered to both businesses across the metal industry and consumers investing in the coin.

Conclusion

According to Ron Paul, a member of the United States congress from 1976 to 2013,

“There are several major efforts being made to replace the fiat dollar with gold or cryptocurrencies, while other countries are making plans to challenge the dollar as the world’s reserve currency.”

The future holds great interest with respect to what may happen with cryptocurrency, stablecoins and gold. Of course, changes in the current system depend on how the government’s aptitude is with respect to providing investors with stablecoin adoption policies and regulatory clarity. Will gold continue to be the reserve currency? Will stablecoins manage to peg a claim in the market? The financial markets are definitely in for a change, but it is too early to predict when and how exactly.

If an investor was to buy or sell $500 million worth of gold, it would create a mere ripple in the gold market, while if the same were to ensue in the cryptocurrency market, the market would destabilize and crash. Nevertheless, interesting developments have been taking place over the past few years and there is a correlation between the cryptocurrency market and that of gold, with cryptocurrency proving to be a suitable alternative to gold and fiat currency.