How does Bitcoin compare with major assets?
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Bitcoin’s growth has accelerated since the end of Q1 2020. Faced with the pandemic’s impact on markets worldwide, investors have sought financial refuge. Bitcoin has been one destination for investor’s money.
Bitcoin is considered a store of value. This means it is intended to maintain its price without depreciating over time.
Year to date (YTD), Bitcoin has gained over 56 per cent on the BTC Markets exchange. Compare this with the S&P ASX 200. Australia’s premier market index has lost 8 per cent of its value YTD.
Currency, equities and precious metals are all stores of value. How does Bitcoin relate to these?
Bitcoin is becoming “increasingly gold-like” according to major financial data and media firm, Bloomberg. Their September crypto report compares these often-associated assets. It states, “Bitcoin’s price should keep appreciating for similar macroeconomic reasons that help gold.”
Bitcoin-gold correlation is currently at an all-time high. The chart below shows a correlation value of 0.77. This means the value of these assets currently has strong positive correlation.
When Bitcoin’s value increases or decreases, so does the price of gold. A value of 1 represents perfect positive correlation.
In this case, price movements of both assets would completely align.
Source: Bloomberg Crypto Outlook, September 2020 Edition.
Insight from data analytics provider Skew supports Bloomberg’s findings. The chart below shows how the price of both assets behaved similarly over the past year.
Source: Skew.com – Bitcoin (black) vs gold (yellow) price comparison.
Bitcoin and gold share several attributes: scarcity, store of value, diversification, and a quasi-currency. These attributes should endure through a pandemic-stricken global economy.
2020 has been a year of unprecedented quantitative easing (QE). QE involves a central bank quickly increasing the domestic money supply. To do this, central banks buy government bonds. The bonds are bought with newly created central bank cash. This cash then enters circulation.
QE usually results in lower interest rates, which in turn impacts bank savings. It therefore makes more sense to invest money than save it.
Effectively, QE is a government’s last resort to spur economic activity. It’s mostly used in times of financial crisis. The Reserve Bank of Australia implemented QE as the pandemic gripped Australia’s economy.
One potential side-effect of QE is increased monetary inflation. Inflation is the general rise in prices of goods and services. This diminishes money’s buying power and its use as a store of value.
As such, investors have sought assets like Bitcoin and gold. Demand for gold has seen the metal reach record prices. Bitcoin’s value may have gained from this.
How closely is Bitcoin linked to stocks? Research, analytics, and news website, The Block, provides insight. Their research suggests that Bitcoin-stock correlations are strongest following poor macro stock market performance. The correlation levels weaken when stocks are performing better.
Further data from Skew supports The Block’s research. The chart below shows Bitcoin-S&P 500 correlation. A value of 100%, or 1, once again represents perfect positive correlation. A value of -100%, or -1, means the opposite, a total negative correlation.
On the 8th of June, the S&P 500 made gains to reach its pre-pandemic value. According to The Block, Bitcoin-stock correlation should weaken when stocks perform well.
We can see correlation weaken on the 8th of June (highlighted below). In early September, the index reached its highest value this year, 3,580.84 points. Once again, correlation weakened that day.
The Block suggests that Bitcoin behaves as a risk asset. When stock markets are risk-averse, Bitcoin’s performance suffers. The opposite applies when investors are more confident with taking risks.
Market and network data provider, Coin Metrics, assesses the correlation between Bitcoin and US Dollars (USD). Throughout the pandemic, the correlation between these two assets has become more negatively correlated.
While the general value of USD has decreased, the overall value of bitcoin has increased.
Both Bitcoin and USD are stores of value. However, the value of each asset is supported differently. The value of USD is backed by the US government. The strength of the US economy supports it further. Bitcoin’s value is derived through scarcity, as well as supply and demand.
As previously mentioned, US markets have been significantly impacted by the pandemic. Meanwhile, Bitcoin’s value has rallied during the same period. This could be why Bitcoin-USD has become more negatively correlated throughout 2020.
How Bitcoin correlates to other assets provides insight for its use. A weak Bitcoin-USD correlation suggests the digital asset is less frequently used as currency.
However, data suggests Bitcoin is more akin to stocks and gold. These assets are primarily used to grow wealth.
2020 provides a glimpse into where Bitcoin sits on the global financial stage. Although originally intended as a digital medium of exchange, Bitcoin’s use has evolved.
Will the use of Bitcoin continue to evolve? Has it found its place among other stores of value such as gold?
Only time will tell.
This article was developed in collaboration with BTC Markets, a Stockhead advertiser at the time of publishing.
This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.