Bitcoin’s price action has often been compared to that of other assets, particularly gold and tech stocks. The narrative of “Bitcoin trades in tandem with tech stocks” was prevalent in 2022 and early 2023 when a correlation existed between the two. However, since that correlation has broken down, there hasn’t been much news coverage. Now, a new narrative has taken the spotlight: the correlation between Bitcoin and gold. Both assets have rallied since the failures of Silvergate, Signature Bank, and Silicon Valley Bank in March. The correlation between two assets can come and go, and it may not always mean that they share a place in the market long-term.
Examining Correlations on a One-Year Basis
Year-to-date, Bitcoin has gained roughly 58%, rising from $16,600 at the start of the year to over $26,000 today. On the same timeframe, the NASDAQ has gained about 36%, rising from 11,000 to just shy of over 15,000. Meanwhile, gold has risen by just over 7% year-to-date. According to the 90-day correlation coefficient, BTC is positively correlated to gold (0.58) and negatively correlated to tech stocks (-0.65) right now.
At the beginning of the year, the correlation between Bitcoin and gold was deeply negative, while the correlation between Bitcoin and tech stocks was just below neutral. So, is Bitcoin a safe-haven asset or a risk asset? Or does the presence of multiple correlations point to no correlation at all? Does similar price action on a yearly basis constitute a significant relationship between two assets in the first place? These questions are best interpreted on a rhetorical basis, i.e., they imply that there could be any number of assets that share similar patterns of price action on a one-year chart.
When looking at the question in terms of percentage gains, things look even more different: gold is up 9%, while Bitcoin is up 18% and the NASDAQ 30%.
The Significance of Correlations
Bitcoin has risen against the US dollar by tens of millions of percentage points over the past 14 years. Few asset classes can boast similar returns. Other assets don’t carry the same degree of volatility either, making a long-standing correlation even less likely. To date, gold has risen from $800 in early 2009 to $1,945 today, a gain of almost 150%. The NASDAQ is up more than 10x since early 2009, or returns in excess of 1,000%. Nice gains, but a far cry from the 52,000,000% that Bitcoin returned from July 2010 to present.
The key takeaway is that an asset that rises by more than 50,000,000% over the course of its lifetime might not be correlated to much else. The correlations between Bitcoin, gold, and tech stocks often can’t be seen on timeframes in excess of a year or two. Due in large part to the previous two points, the correlations don’t hold much significance. Investors would do well to keep this in mind when interpreting markets. Banking on any specific correlation as part of a strategy could be risky, as that correlation could break at any moment.
While Bitcoin’s correlation to gold and tech stocks has been a topic of interest, it may not hold much significance in the long-term. Correlations can come and go, and investors should not rely on them as part of their strategy. The significance of correlations depends on various factors such as the timeframe and percentage gains. Therefore, it is important to examine correlations on a case-by-case basis and not make assumptions based on past correlations.
Leave a Reply