The correlation between Bitcoin and gold prices has risen to new heights in recent months following a bullish close into 2023 and the approval of a spot Bitcoin ETF.
Bitcoin’s relationship with gold has fluctuated throughout most of the digital asset’s history. This means that the prices of the two assets have mostly moved independently – when one rises, the other does not necessarily follow. But the correlation became stronger after the market collapse in 2020 at the beginning of the Covid-19 crisis, and is now again approaching historical levels.
Bitcoin’s correlation with gold is currently 0.76 (or 76%). A correlation of 1 means that there is a perfect, positive relationship between two variables, in this case the price of Bitcoin and gold (-1 means perfect, negative relationship). Although the relationship between Bitcoin and gold has not yet reached record levels, it is now approaching.
“Bitcoin’s relationship with (traditional finance) markets is constantly evolving,” cryptocurrency exchange Binance noted in a report published earlier this month. “Currently, Bitcoin’s correlation with the S&P 500 is at its lowest levels in more than three years.” Bitcoin’s correlation with gold has risen significantly, reaching around 75% by the end of 2023, according to long-term trends. Global central banks are adopting interest rate hikes, signaling a temporary shift in stock market behaviors.
The introduction of Bitcoin ETFs to the US market last week was also a watershed moment, heralding Bitcoin’s move into equity-like assets.
Despite this, Bitcoin’s correlation with gold has strengthened, and the correlation between Bitcoin and gold today stands at 76%, just a few points behind the all-time high of 79%. This suggests a close relationship between the two assets (both considered a powerful store of value by their proponents), even as Bitcoin is present in more aspects of mainstream finance.
The charts also show the Bitcoin-to-gold ratio rising sharply throughout 2023, reaching a peak near the end of the year before a slight rebound earlier this month, likely as the hype around ETFs fades. The Bitcoin-to-Gold ratio is a measure produced by dividing the price of Bitcoin by the price of gold, which roughly tells us how many ounces of gold can be purchased with one Bitcoin.
At its peak, the ratio reached 22.5, meaning that 22.5 ounces of gold could be purchased with 1 Bitcoin. The figure shows the purchasing power of Bitcoin compared to gold, reaffirming the belief among Bitcoin believers that Bitcoin provides a reliable store of value.
But why is Bitcoin gaining greater alignment with gold, especially when Bitcoin’s entry into the stock market via ETFs signals a shift toward correlation with stocks? It seems that despite these stock-like properties, investors may still be seeking solace in Bitcoin’s gold-like qualities.
With US inflation remaining above the Fed’s desired 3.35% target, and Bitcoin rising 155% in 2023, the narrative seems clear. Investors aren’t just chasing growth; They also seek stability in the face of economic uncertainty. Bitcoin, with its gold-like performance, offers a semblance of this stability.
The affinity between Bitcoin and gold highlights the complex and changing nature of Bitcoin as a digital currency and asset class. As it matures, Bitcoin appears to retain select qualities of gold while also absorbing those of stocks and commodities.