According to a report that was published not too long ago by Kaiku Research, the correlation between Bitcoin and gold reached its greatest level in more than a year last week, reaching +0.4. Despite the falls that were seen in crypto and stock markets early this year, gold had a successful start to the year. The precious metal, on the other hand, has given up all of these gains and is now down 10% for the year (YTD).
A correlation of +1.0 indicates that the price movement of both assets is in lockstep and in the same direction. Over the course of the last year, the correlation between Bitcoin and gold has often been in the range of -0.2 to +0.2, which indicates that the two have remained mostly uncorrelated.
In spite of the fact that Bitcoin has long been touted as a “digital gold” and a hedge against inflation, similar to the golden metal, it seems that investors do not agree with this assessment.
After making significant gains over the first three months of the year as a result of the crisis between Russia and Ukraine, gold has already given up all of its gains and is presently down ten percent year to date. According to the analysis, the tightening of monetary policy throughout the world has been a major factor in Bitcoin’s double-digit price drop this year.
So What Causes This?
Over the course of the last year, there has been no correlation between Bitcoin and gold. The correlation between the two assets varies from a value of 0.2 in the negative to a value of 0.2 in the positive.
In spite of this, as the value of the US dollar has climbed, the value of both cryptocurrency and gold has decreased, which according to a study by Kaiko has enhanced the connection between the two assets.
In order to maintain control over it, central banks have been increasing the levels of inflation. In spite of the tightening of monetary policy, inflation has continued to be quite high. Gold has not fulfilled its role as an asset that provides stability either. It is anticipated that gold would perform well as a store of value during times of inflation and declining prices of fiat currencies since gold is a secure asset.
Because gold is priced in dollars and is backed by dollars, the precious metal is very sensitive to increases in the interest rates in the United States. The opportunity cost of storing metal that doesn’t yield returns is increased when rates are higher, since the money that’s being held may be used to purchase government bonds, for instance, which now pay greater rates of return.
As part of the strategy to control inflation in the United States, the Federal Reserve of the United States said in January that it intended to undertake four interest rate increases throughout the course of this year.
As a direct result of the news, the price of bitcoin saw an abrupt decrease. The Federal Reserve has been successful in carrying out its intentions, as shown by the fact that interest rates throughout the nation have recently climbed.