Gold and Bitcoin prices: the surprising relationship
I analyzed 10 years of Gold & Bitcoin prices so you don't have to.
Understanding the relationship between different assets is crucial for making informed investment decisions. The correlation coefficient is one way to measure this relationship.
This post explores the correlation between two popular stores of value: Gold and Bitcoin.
Gold: A "safe-haven" asset valued for its rarity, durability, and historical significance.
Bitcoin: A digital asset known for its decentralized nature and limited supply, often called "digital gold."
1. What is the Correlation Coefficient?
The correlation coefficient is a statistical measure that describes how two variables move in relation to each other.
It ranges from -1 to +1, where:
+1: Perfect positive correlation (both variables increase together).
0: No correlation (no predictable relationship).
-1: Perfect negative correlation (one variable increases as the other decreases).
2. Calculating the Correlation
Using daily price data from September 2014 to May 2024, the correlation coefficient between Gold and Bitcoin is approximately 0.82.
A 0.82 correlation indicates a strong positive relationship: when Gold's price rises, Bitcoin's price tends to rise too, and vice versa. However, this relationship can change over time.
Why is this Important?
Understanding the correlation between gold and Bitcoin can help investors make better portfolio decisions. For example:
Diversification: Positively correlated assets move together, so diversifying with low or negatively correlated assets can reduce risk.
Hedging: Knowing the correlation helps in constructing hedging strategies. If Bitcoin and Gold are positively correlated, holding both might not reduce risk as much as holding an asset with a low or negative correlation to Bitcoin.
Limitations
The correlation coefficient offers valuable insights but isn't a complete picture. Market sentiment, economic conditions, and regulatory changes can influence the relationship between Gold and Bitcoin. The correlation can also vary over different periods.
4. The Gold - Bitcoin Mapper
The Gold-Bitcoin Mapper shows how many grams of gold you can buy with 1 Bitcoin. Updated every 10 minutes.
You can access it here: https://www.hyfiblockchain.com/gold-bitcoin.php