The exchange rate of bitcoin and gold: how they compare and which is more profitable as an investment

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Opinion

You can often see bitcoin called "digital gold" on the Internet.Is there any correlation between the prices of these two assets?

Analysis of the movement of gold and BTC prices

So, if we try to consider the price dynamics over a long period of time, we will find almost no correlation between the two assets.However, in certain periods, the prices of conventional and "digital" gold followLet's take a closer look at the reasons for this movement and whether there is a correlation between them.

Change in the price of gold

Since historically the first cryptocurrencyappeared 14 years ago, analyzing the price of the precious metal, we will not go deep into the history and times of the “gold standard”. Consider the change in the price of gold over the past few years. Thus, in “pre-pandemic” times from October 2018 to mid-February 2020, the cost of an ounce of the precious metal soared from $1,200 to $1,600. In other words, gold became more expensive by a third, in just over 15 months.

However, the volatility of the precious metal turned out to besmall. Over 15 months, the weekly price change was only several times higher than 4%. So the overall growth of 33% is quite good for an asset that is considered “safe” and, according to some investors, does not carry large risks.

The onset of the pandemic had an extremely negative impact onsituation in markets and the economy as a whole. This also affected gold, but to a much lesser extent. In just a couple of weeks, the price fell by 14.4% to $1,450 per ounce. However, then things went uphill. Already in April, gold cost more than $1,750, and by August it exceeded $2,000 per ounce.

Thus, the COVID-19 pandemic, causingthe initial shock subsequently became a catalyst for the growth of quotes by more than 27%. Many, against the backdrop of an unstable economic situation, tried to protect their savings in traditional and time-tested financial instruments.

Source: tradingview.com

Further, investor enthusiasm regardinggold has decreased. By the end of March 2021, its price dropped by more than 18% from the highs of August 2020 and fell below $1,700. Only in March 2022 did the price reach the August 2020 values. Thus, we can say that in 20 months the price of gold has not changed much, if you do not take into account that it first fell and then rose back.

In general, there is nothing unusual in such fluctuations in precious metal rates. But the general trend and the fact of price growth from March to August 2020 are interesting.

It is also noteworthy that in September 2022The price of gold has fallen to just above $1,600 - the same level that became the starting point for growth in 2020. By and large, then he was resistance, but he became support. In January 2023, the price exceeded $1,900 and so far there are no signs of stopping there.

2022 was a particularly difficult year for the economy andfinancial sector. Inflation, which reached peak levels in several years, also played a role. All this led to a decrease in the price of gold and a number of other “defensive” assets. It can be assumed that something similar was observed in the second half of 2020 and early 2021.

Perhaps for some a return to price,exceeding $1,900 came as a surprise, although from the point of view of technical analysis everything is quite understandable. And the fundamental prerequisites have not changed: gold remains a “safe haven”, a protective asset in times of recessions and economic instability, when investors expect, if not to make money, then at least to minimize possible losses.

BTC price change

And here is the price of Bitcoin right before the startthe pandemic did not show breakneck growth. From July to December 2019, the price of “digital gold” fell by more than $7,000 – from $13,880 to $6,425. This was followed by a rebound to the $10,000 area.

Interestingly, the pandemic affected the price of BTC as negatively as it did gold. Only the drawdown of the first cryptocurrency by capitalization turned out to be much more significant - more than 60%.

Further, in April 2020, like gold,Bitcoin began to win back losses. However, the growth was not so rapid, and the cryptocurrency returned to “pre-pandemic” levels only in June. The bullish trend finally took hold in BTC only in November, when the July 2019 high was exceeded, and later the “psychological milestone” of $20,000 was reached.

The bull market of 2020 and 2021 can be roughly divided into two phases: the first from November 2020 to April 2021, the second from mid-July to early November 2021.

There has been a bear market for almost all of 2022.Since November, signs of a “thaw” and an upcoming change in trend have appeared. By January 23, 2023, the price of BTC had increased by more than 50%. And although the percentage is impressive, the movement in Bitcoin itself is much less impressive than in gold. This is explained by the completely different volatility of the two assets.

Source:
tradingview.com

Correlation between gold and bitcoin prices

If we talk about the direct dependence of the price of oneasset from the price of another, then it most likely does not exist. You probably won't be able to look at a gold chart and come to a clear conclusion about what will happen to BTC and vice versa. However, sometimes similarities are found in asset price behavior.

The first period of time is the recovery of markets after the start of the pandemic.

Between March and April 2020, the US Federal Reservestarts the printing press and produces a huge amount of money. This immediately affects the level of inflation and, as a result, the price of gold. The precious metal has been steadily increasing in value for 5 months - until August. In turn, BTC reacts more restrainedly.

However, at the end of 2020 Bitcoin is also moving towardsgrowth. Of course, the time periods do not coincide for assets, but the movement trend is the same. By and large, the whole difference lies in several factors. Firstly, Bitcoin’s growth has gone through two phases compared to gold’s one. Secondly, it began with a delay of several months (meaning overcoming previous highs, since the growth from the lows coincided with the growth of gold). Thirdly, the amplitude of price changes was different, which can be explained by the difference in the volatility of assets. Fourthly, there are fundamental factors that have an additional impact on the long-term rate of Bitcoin, namely: the schedule of upcoming halvings, the level of network hashrate, negative news background on the bankruptcies of individual players in the crypto industry, and others.

In the movement of gold prices, two can also be distinguished:phases, notes Cryptonomist. However, in time they will not coincide with those of Bitcoin due to the above reasons. The second phase occurs at the end of 2022 and is caused by geopolitical events.

In addition, one can see some distant similarity in the 2022 decline in both assets. Of course, in Bitcoin it was much more painful and larger in scale, but the trend took place.

If we generalize and do not take into account the fact,that the volatility of assets is different, and therefore jumps in prices too, then for both assets one can notice repeating patterns: first growth, then decline, then again growth, similar to the first.

And yet about the literal direct correlationthere is no need to talk. Firstly, the events do not coincide in time. Secondly, if there was a real collapse in Bitcoin, then in gold it was rather a small correction. Third, precious metal prices are relatively close to their peaks, while BTC would need to triple to reach an all-time high.

What affects prices

Gold and Bitcoin are two different assets, startingfrom the physical difference to how the price of each of them changes. And yet there is a nuance that has a serious impact on the value of both instruments - the Fed's monetary policy.

It can be seen with the naked eye that inIn the long term, both gold and Bitcoin are rising. Unlike, by the way, the dollar. In addition, there is a fairly clear trend: if the dollar is strong, then gold and BTC fall, and vice versa.

The facts confirm this.Take November 2022, for example. Then the dollar weakened (not against the ruble), and gold strengthened. BTC was unable to grow similarly, as the crypto market was in a fever from the bankruptcy of FTX.

Digital and regular gold

But why are there prices for these instruments at all?different from the dynamics of the dollar? In a sense, both are its direct competitors. The dollar, like other government fiat currencies, is characterized by inflation in the long term due to unlimited emission. Gold is viewed as a defensive asset primarily as an item that allows one to avoid the costs associated with inflation. Bitcoin conceptually contrasts itself with a fiat centralized currency with unlimited emission. The emission of BTC is strictly limited and as the reward for new blocks found decreases, no more than 21 million bitcoins will be mined. That’s why many crypto enthusiasts call BTC “digital gold.”

To summarize, we can say that both assets areFirst of all, they oppose themselves to traditional fiat currency and strive to minimize the risks associated with inflation and an unstable economic situation. In this regard, gold has much less volatility and belongs to the class of protective assets. Bitcoin, on the contrary, has high volatility and its rate depends on a number of factors, including market ones, such as bankruptcies of large companies. Therefore, Bitcoin may not provide unambiguous protection against the backdrop of a recession or instability in the market, at least during the period of its deep correction and the so-called crypto winters.

What does this mean for investors

Investors generally don't care whether assets are directly linked. The main thing for them is to preserve and increase their hard-earned money. Let's look at two examples.

From the beginning of November 2022, gold moved togrowth. In less than three months, the price of one ounce of the precious metal rose by a little more than 17.6%. During the same period, the price of Bitcoin increased by almost 50%. Thus, investing in gold was a profitable investment, but investing in BTC was simply a “grail”.

Now let's move on to periods of decline.From March to September 2022, the price of gold fell by 22%. Over the same period of time, Bitcoin fell by more than 50%. Thus, the rate at which BTC fell was more than twice as high. What conclusion can be drawn from all this?

What it all comes down to is that, as already mentionedhigher, Bitcoin is more volatile compared to gold. During periods of growth, the potential profit will be greater. However, if “winter is coming,” then the price of BTC will decline much faster than that of conservative gold supporters.

The two examples above are taken specifically,so that time periods coincide where the dynamics of both assets will be the same. In fact, this is not always the case. There may be periods when gold rises and BTC falls, and vice versa. In this case, it is more profitable to take what grows. If you are a trader and the exchange provides you with a short trade, then that is what falls. Overall, if you want to make money quickly, then BTC will better suit your goals - buy when it rises, short when it falls. Remember that any short may result in your deposit being reset to zero.

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This material and the information in it does not constitute individual or other investment advice. The opinion of the editors may not coincide with the opinions of the author, analytical portals and experts.