Key Takeaways

• Bitcoin’s correlation with gold is at a two-year low
• Divergence highlights yet again that Bitcoin remains a risk-on asset
• This may change in the future, but for now, Bitcoin resides on the long-end of the risk spectrum 
• With full effects of tight monetary policy still to come, market should not get ahead of itself

Bitcoin’s correlation with gold continues to fall, highlighting the oft-repeated goal of achieving a store-of-value status akin to digital gold remains a long way off for now. 

We looked into this last month, when the correlation between gold and Bitcoin fell to the lowest value since the FTX collapse in November, an event which sparked mayhem in the crypto markets while the rest of the financial world traded quite placidly, including gold. 

Since then, the correlation has continued to fall. Indeed, looking at the more volatile 30-day Pearson correlation metric, the relationship is approaching a near-perfect negative one over the past thirty days. The last time it dipped this close to -1 was over two years ago (it nearly hit this level post-FTX also). 

While the prior metric is a little noisy and bounces around a lot due to the rolling 30-day window sample size, the next chart displays the same indicator but over a 60-day rolling window. Outside of the FTX collapse in November, the 60-day correlation is the lowest it has been in eighteen months, when Russia invaded Ukraine in February 2022 and sparked extreme volatility in the financial markets.

What does this tell us? Not much, really, beyond what we already know: Bitcoin trades like a risk-on asset. That much has been clear over the past two years or so, as one of the fastest rate hiking cycles in recent history has pulled the rug out from risk assets. The Nasdaq shed a third of its value last year in what was the worst year for stocks since 2008. Bitcoin was far from immune, falling down to a low of $15,500 in the aftermath of the FTX collapse. 

While the question over whether Bitcoin can decouple from risk assets in the long term remains one of the most intriguing, the numbers make it blindingly obvious that this has not happened to date. The pullback during last year’s bear market also emphatically strikes down any assumption that Bitcoin’s days of violent drawdowns were behind it (we are most definitely not in a “supercycle”), with the fall of over 75% from peak to trough being the fourth-worst in the last decade. 

The recent dip in correlation follows a turbulent period in the crypto markets. The SEC sued both Binance and Coinbase, the two biggest exchanges on the planet, in the first week of June. Last week, Ripple secured a big win when a (partial) ruling on its two-year battle with the SEC seemed to imply it is not a security (although ambiguity does remain and there will likely be an appeals process). 

These developments are obviously specific to the crypto markets, and with crypto not yet having a tangible impact on traditional finance markets, the turbulence did not carry over. 

Additionally, the decoupling of gold and Bitcoin pours cold water on the theory that Bitcoin had already obtained its “hedge” status, which was spoken in some quarters as the asset rose amid the banking wobbles in March. In reality, while this price action was intriguing, it was likely more to do with the market pricing in a lower chance of future interest rate rises, as we discussed here. 

“In a lot of ways, Bitcoin’s correlation with gold can be viewed as a progress tracker on the path to achieving the holy grail: an uncorrelated store of value for investors”, says Max Coupland, director of CoinJournal. “With this correlation dipping to a two-year low, it is clear there is a long way to go yet. Bitcoin remains highly susceptible to the whims of the stock market and the macro economy, and that is worth bearing in mind for investors amid the recent rise in crypto valuations”. 

Remember, last year represented the first time in Bitcoin’s history that it observed a pullback in the stock market. Prior to that, it was humming along in the longest and most explosive bull markets in history, kicked off almost to the day when Bitcoin was launched (the stock market bottomed in March 2009, two months after the genesis block was mined). 

All in all, Bitcoin is still trading like a risk asset, and it has experienced the pain of that label in the past eighteen months as interest rates have spiked aggressively. While it is up over 80% thus far in 2023, it remains 56% off its peak from November 2021. 

Nonetheless, things are undoubtedly brighter today than they were nine months ago, when FTX collapsed and the world seemed destined for a gruesome recession. While that recession still may come (and indeed the prospect of lagged effects of tightened monetary policy loom large), economic indicators have been remarkably resilient while hopes of a soft landing have risen. 

Personally, I fear the market may be getting ahead of itself, but what do I know? The sheer scale of rising from a zero-rate environment to a climate where T-bills are paying north of 5% is ferocious, and won’t be shrugged off lightly. Indeed, looking at previous cycles throughout history, the stock market has tended to pull back further after hikes have ended. 

While past performance is never indicative of the future, it certainly should provide food for thought, as phrases such as “meme stock”, “altcoin” and “robinhood” creep back into the vernacular. 

But whatever happens, the charts are clear: Bitcoin is still a risk-on asset. That means if the blood does hit the streets, gold will strongly outperform its digital cousin. Maybe that will change one day, but for now, the numbers don’t lie. 

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