IMPORTANT POINTS:
- Bitcoin correlations with gold and the Nasdaq can come and go.
- In terms of percentage gains, Bitcoin has outperformed both.
- Long-term correlations with other assets tend to break down due to Bitcoin’s unique volatility.
Bitcoin traders always talk about the correlation of BTC with gold and stocks, but how much attention should average investors pay to this discussion?
Some news sources have been happy to draw comparisons between the price action of Bitcoin and that of other assets. In particular, the two most widely compared asset classes are gold and technology stocks.
When a correlation holds up, it tends to be great news. For much of 2022 and early 2023, for example, the “Bitcoin trades in parallel with tech stocks” narrative was predominant. However, since that correlation has broken down, there doesn’t seem to be much-related news coverage.
Now a new narrative has taken center stage: that of the correlation of Bitcoin with gold. Since the failures of Silvergate, Signature Bank and Silicon Valley Bank in March, both assets have rallied. Both narratives make sense on the surface. If Bitcoin is considered a speculative asset, then it could trade similar to a technology stock. And if Bitcoin is more of a safe haven asset, a correlation to gold seems reasonable.
However, it is important to note that correlations can come and go. Just because two assets share a correlation for a while does not always mean that they share a place in the market in the long term. And by looking at larger timeframes, it might be possible to rule out any sort of correlation.
Bitcoin, Gold and NASDAQ: One-Year Correlation Analysis
By examining both correlations over a year’s time, we can see if there is any merit to them. Bitcoin has gained roughly 58% to date, rising from $16,600 at the start of the year to over $26,000 today. In the same timeframe, the NASDAQ has gained around 36%, rising from 11,000 to just over 15,000. Meanwhile, gold is up just over 7% year to date.
Based on the 90-day correlation coefficient, BTC is positively correlated with gold (0.58) and negatively correlated with technology stocks (-0.65) at the moment. For most of this year, BTC has been highly correlated with both assets. Earlier in the year, the correlation with gold was deeply negative, while the correlation with technology stocks was just below neutral.
Then what is? Safe Haven Correlation or Risk Asset Correlation? Or does the presence of multiple correlations point to no correlation at all? Does similar price behavior over a year’s time constitute a significant relationship between two assets in the first place?
These questions are best interpreted on a rhetorical basis, that is, they imply that there could be any number of assets that share similar price action patterns 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 is up 30%.
It would be great if we could get some meaning out of the fact that Bitcoin has a tendency to be correlated with stocks from time to time. But so far this year, the relationship between the two has remained constant throughout the banking crisis that began in March and led to a huge rally for BTC. Since then, the relationship has faded, as the NASDAQ has rallied to yearly highs and BTC has mostly traded sideways.
In a long enough timeline, everything breaks down.
Over the past 14 years, Bitcoin has risen against the US dollar by tens of millions of percentage points. There are few asset classes that can boast similar returns. Other assets also do not carry the same degree of volatility, making a lasting correlation even less likely.
To date, gold has risen from $800 in early 2009 to $1,945 today, an increase of almost 150% .
The NASDAQ is up more than 10 times since early 2009, or returns greater than 1,000%. Those are nice gains, but they are a far cry from the 52,000,000% that Bitcoin returned from July 2010 to the present.
The keys here are:
- An asset that rises by more than 50,000,000% over its life may not be correlated with many others.
- Correlations between Bitcoin, gold, and tech stocks often cannot be seen in timeframes longer than one or two years.
- Largely because of the two points above, the correlations don’t matter much.
