By Mike Allison
Bitcoin has been very much in the news lately, having moved significantly higher in the weeks following the recent election. It is approaching 100,000, up from just under 70,000 prior to the election.
I ran across this week’s Chart and thought it was worthy of discussion. The Chart reveals the fascinating dynamic between Bitcoin and Gold during the period from 2020 to 2024 , showing distinct patterns of interaction and relative performance.
Performance Comparison
Bitcoin’s 2021 rally saw its price climb from $30,000 in January to nearly $69,000 in November, representing a 130% gain. During this same period, Gold fell slightly, declining from $1,950 to $1,750 per ounce, a loss of around 10%. This divergence contributed to the Bitcoin-to-Gold ratio spiking to 37 by late 2021.
Similarly, in 2023, Bitcoin surged again, rising from $16,000 in early January to over $35,000 by November—a gain of 120%. Meanwhile, Gold rose from $1,830 to $2,050 per ounce, a more modest increase of about 12%. These numbers illustrate Bitcoin's superior upside during bull markets.
In contrast, during the bear market of 2022, Bitcoin's price plummeted by nearly 65% from $47,000 in January to around $16,000 in December, while Gold remained resilient, increasing by about 3% over the same period.
Volatility Comparison
Bitcoin’s inherent volatility sets it apart from Gold. During the 2021 bull market, Bitcoin’s 30-day rolling volatility exceeded 90%, while Gold’s volatility remained around 10%. This disparity reflects Bitcoin’s susceptibility to market sentiment, liquidity changes, and regulatory news. For instance, Bitcoin’s sharp decline in mid-2021 was partly triggered by China’s crackdown on cryptocurrency mining and trading. Gold, in contrast, provides a stabilizing counterbalance, making it a cornerstone for conservative investors.
The extreme swings in the Bitcoin-to-Gold ratio, such as the spike to 37 in 2021 and the low of 5 in mid-2020, underscore the cyclical nature of these assets’ relative performance. This offers tactical opportunities for portfolio rebalancing, as highlighted in the chart's “Buy Bitcoin/Lighten Gold Zone” and “Sell Bitcoin/Buy Gold Zone.”
Correlation Dynamics
The Bitcoin-to-Gold ratio offers a compelling perspective on the interplay between two seemingly contrasting assets. Gold, a traditional safe haven, tends to perform well in periods of macroeconomic instability or inflation, while Bitcoin, often dubbed "digital gold," attracts investors seeking high returns and a hedge against fiat currency devaluation.
The chart’s marked zones reflect the inverse correlation during key market cycles. For example, when Bitcoin vastly outperformed Gold in 2021 and late 2023, the ratio surged to 35 and 37, respectively. During these periods, Bitcoin benefited from speculative inflows fueled by institutional adoption and inflation concerns. Conversely, in periods like 2022, when the ratio dropped to near 10, Gold outperformed due to its steady appeal amidst geopolitical tensions and rising interest rates.
Historically, Bitcoin’s correlation with Gold has been low, oscillating between -0.1 and 0.3, according to data from CoinMetrics.
Final Thoughts
While Bitcoin and Gold can both act as inflation hedges, their price drivers and investor bases remain distinct, making them complementary in diversified portfolios.
The evolution of the Bitcoin/Gold ratio from 2020 to 2024 demonstrates Bitcoin's progression as an investment asset. While maintaining higher volatility than gold, the moderation in extreme peaks and more defined trading ranges in recent periods suggests a gradual maturation of the cryptocurrency market, at least as it relates to Bitcoin.
By understanding their cyclical dynamics and responding to shifts in the Bitcoin-to-Gold ratio, investors can align their strategies with market conditions and their risk tolerance. However, the regulatory environment remains a key variable for Bitcoin, especially under the renewed Trump Administration. As such, monitoring macroeconomic policies and potential legislation will be critical for navigating the future of this dynamic pairing.
Sources:
Fidelity Digital Assets - FidelityDigitalAssets.com
CoinMetrics Correlation Data - CoinMetrics.io
World Gold Council - Gold.org
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