In the eyes of some market observers, bitcoin is still searching for its place in the asset allocation spectrum, but many backers of the digital currency typically compare it to gold, a comparison gold bugs are often loathed to acknowledge.
Gold bugs often say bitcoin is too volatile to be considered a legitimate safe-haven investment and that cryptocurrencies have a weak case as stores of value. Indeed, long-term data show loose correlations between bitcoin and bullion. However, the coronavirus outbreak is forcing some tightening of the gold/bitcoin relationship.
“Our analysis shows that bitcoin correlation to gold remains low long-term. However, during the most recent COVID-19 induced broad market sell-off, bitcoin correlation to gold has increased significantly,” said VanEck in a recent note.
Buying Into Bitcoin Benefits
Bitcoin’s historical volatility trends, which have ebbed somewhat, have often prevented some market observers from calling the digital asset a safe-haven on par with gold, but the coronavirus headlines could be prompting some investors to revisit that thesis. There’s no denying there are some exponential growth estimates associated with bitcoin.
“In The Investment Case for Bitcoin, we discussed how bitcoin may potentially increase portfolio diversification because of its low correlation to traditional asset classes, including broad market equity indices, bonds, and gold,” notes VanEck. “In our long-term study, considering correlation data between 2012 and late March 2020, bitcoin exhibits low correlation to traditional asset classes. Bitcoin falls into the -0.1 and 0.1 correlation range with most traditional asset classes.”
Unlike fiat currencies, which can be printed by central banks at will, with only 21 million bitcoins ever allowed in existence, the supply of the cryptocurrency is limited algorithmically. After the next halving, only half as many BTC will be generated per day. (4,380 x 6.25 x 5,000 = $136,875,000 per month). Bitcoin is scheduled to undergo a halving in May.
“Looking at more recent correlation data, we note that bitcoin’s correlations with traditional asset classes have begun to increase during the COVID-19 induced global market sell-off,” according to VanEck. “Most notably, bitcoin’s correlation with gold has reached levels never before seen. We believe this may further cement its relationship with what is commonly viewed as safe haven assets and may bolster its potential as ‘digital gold.’”
For a two-week stretch in March, bitcoin’s correlation to gold was high on a historical basis while remaining low to other asset classes.
“Specifically, from March 13 to 27, bitcoin’s correlation with gold was 0.47 and 0.13 with U.S. bonds while -0.25 with the S&P500, -0.18 with the Nasdaq 100 and only -0.12 with US real estate. Bitcoin showed no correlation with emerging market currencies and 0.15 with oil,” notes VanEck.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.