Bitcoin and correlations — Examining the relationship between BTC, gold and the Nasdaq

Certain news outlets have been known to draw parallels between Bitcoin’s (BTC) price fluctuations and those of other investments. In particular, the two most frequently mentioned are gold and tech stocks.

When a correlation is present, it often becomes a major headline. For instance, during the majority of 2022 and the start of 2023, the notion of “Bitcoin trading in line with tech stocks” was widespread. Now that the correlation has been disrupted, however, there appears to be little related media attention.

The focus of discussion has now shifted to the correlation between Bitcoin and gold. Following the collapse of Silvergate, Signature Bank, and Silicon Valley Bank in March, both assets have experienced an increase in value. Both of these interpretations make sense when examined closely. If Bitcoin is considered a speculative asset, it would be expected to behave similarly to a technology stock. If Bitcoin is viewed as a safe-haven asset, then a relationship to gold is rational.

It is noteworthy, however, that correlations can fluctuate. Just because two assets have a correlation for a period does not necessarily imply that they will be linked in the market in the long run. Furthermore, when taking a broader view of the timeline, it may be possible to discount correlations altogether.

Let’s take a look at these correlations over the course of one year and see if they are valid.

Bitcoin, gold and NASDAQ: one-year correlation analysis

So far in 2020, Bitcoin has seen an increase of 58%, going from $16,600 at the beginning of the year up to over $26,000 now. During the same period, the NASDAQ has seen an increase of 36%, going from 11,000 to nearly 15,000.

Gold has increased by approximately 7% year-to-date.

As indicated by the 90-day correlation coefficient, BTC is currently exhibiting a positive correlation to gold (0.58) and a negative correlation to tech stocks (-0.65). For the majority of the year, BTC has been strongly correlated to both assets. At the start of the year, the correlation to gold was significantly negative, while the correlation to tech stocks was only slightly below neutral.

So, what is it? Is there a correlation between safe-haven assets and risk assets? Or is the presence of multiple correlations indicative of no correlation? Does the similarity of price action on a yearly basis even suggest a meaningful connection between two assets?

Such a conversation could be quite lengthy. These queries are best understood in a rhetorical sense, meaning they suggest that there might be many assets with similar price movements over a one-year period.

When considering the question in terms of percentage increases, the picture is even more varied: gold has increased by 9%, Bitcoin by 18%, and the NASDAQ 30%.

It has been observed that Bitcoin has had a tendency to be correlated with equities at times. However, in 2020, the connection between the two stayed the same during the banking crisis that started in March and brought about a huge surge for BTC. Since then, the correlation has faded, as the NASDAQ has climbed to its yearly highs and BTC has largely traded sideways.

On a long enough timeline, everything breaks down

Over the past 14 years, Bitcoin has seen an increase in value relative to the US dollar in the tens of millions of percentage points. There are few asset classes that can compare to such returns, and even fewer that have the same level of volatility, making a sustained correlation even less probable.

Gold has seen a remarkable increase of almost 150% since 2009, when it was valued at $800, and is now priced at $1,945.

The NASDAQ has experienced an increase of more than 10 times since the beginning of 2009, yielding returns of over 1,000%. Although these are impressive gains, they are nowhere near the 52,000,000% returns that Bitcoin has seen from July 2010 to the present day.

The main points to remember are:

Investors should bear this in mind when analyzing markets. Relying on any particular correlation as part of an investment plan could be dangerous, as the correlation could suddenly become invalid.

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