3 - 4 minute read
As the world grapples with banking turmoil and inflation concerns, the correlation between Bitcoin and gold has surged to its highest level in over a year, according to research from blockchain analytics firm Kaiko. This newfound correlation is a significant shift, as Bitcoin and gold were mostly uncorrelated in 2021.
Per Kaiko’s report, the correlation between Bitcoin and gold now stands at 50%, while its stock market correlation stands at roughly 20%, having been on the decline since December. This suggests that Bitcoin may be drifting toward risk-off asset status, behaving more like a safe haven asset.
Bitcoin bulls have often compared the cryptocurrency to “digital gold,” with some even hypothesizing that it could replace the precious metal as a safe haven monetary instrument of the 21st century. While the theory failed to live up to reality for a long time, recent market conditions have reignited this debate.
Mid-March saw Bitcoin rally to $28,000 and gold rise just shy of $2000/oz after banking fears ripped through the United States. After Silicon Valley Bank and Signature Bank were jointly closed, the Federal Reserve agreed to backstop all depositors and add hundreds of billions of dollars in liquidity back into the banking system to prevent further bank runs.
Indeed, deposit outflows from banks recently registered their 9th straight weekly decline, with large banks experiencing $129 billion in outflows last week – the largest weekly figure ever. Panic in the banking sector has also spread into Europe, where Credit Suisse has been bought out by UBS after a bank run, and even Deutsche Bank experienced a brief demand spike in the cost of its default insurance.
In this context, Bitcoin’s newfound correlation with gold makes sense. Both assets are theoretically meant to fight against inflation, and as inflation continues to rise, investors may be seeking out alternative stores of value. Bitcoin, like gold, is reliably scarce, divisible, and pure, but comes with added benefits of digitization that make it an effective form of money.
However, it’s important to note that Bitcoin is still a highly volatile asset, and trading carries high risk. While the recent surge in correlation to gold may suggest a shift toward more stable behavior, it’s never wise to assume that any asset will behave predictably in the future.
That said, for traders looking to diversify their portfolios and hedge against inflation, Bitcoin and gold may be worth considering. The current market conditions are unprecedented, and it’s unclear how long the banking turmoil and inflation concerns will persist. As always, it’s important to do your own research and consult with financial advisors before making any investment decisions.