Analyze the correlation of Bitcoin with gold and crude oil: Is Bitcoin a commodity, currency or a safe-haven asset?

It has been more than ten years since the creation of Bitcoin, but it is difficult for both cryptocurrency enthusiasts, investors, and regulators to reach a consensus on the classification of Bitcoin. Bitcoin is often compared to a currency, a commodity, an investment asset, and some even think it has no potential value. However, from the perspective of most regulators, Bitcoin is considered a commodity, it is related to gold, and it is often compared to "new gold" or "digital gold".

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This week, as tensions between the United States and Iran intensified, the price of gold hit a six-year high, and at the same time, the price of bitcoin rose by nearly 20%. As a result, analysts are trying to re-evaluate the short-term and long-term price movements of bitcoin with commodities and other traditional assets to see how relevant they are.

How relevant is the price of Bitcoin and gold?

We can see from the bitcoin and gold price trends from April 2013 to the present that gold reached a high point in 2020, while Bitcoin reached a high point at the end of 2017. So what's the connection between them?

By calculating the correlation between gold and bitcoin prices in the overall sample (from April 2013 to December 2019), it was found that the correlation between bitcoin and gold is quite high, reaching 46.5% (0% is not Correlation, 100% is completely positive correlation, and -100% is completely negative correlation).

Interestingly, when comparing the price correlation between Bitcoin and gold in 2018 and 2019, we found that its price correlation increased from 60.3% in 2018 to 70.8% in 2019.

Based on the above results, we propose the assumption that as the cryptocurrency market continues to mature, the price trend of bitcoin will begin to resemble traditional assets. In addition, there are similarities in the correlation between the lagging prices of gold and Bitcoin.

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Figure 1: Gold prices from April 2013 to Christmas 2019

From a price perspective, there is a correlation between Bitcoin and gold

Over the past week, the price of gold has surged to an all-time high of $ 1,606 per ounce, and gold futures prices and volatility have also increased. At the same time, the price of Bitcoin has surged above $ 8,300, the highest price for Bitcoin since November 2019.

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Figure 2: Bitcoin's price over the past 7 days. Data source: Coinmarketcap

In addition, on January 8 this year, the daily trading volume of Bitcoin reached the highest level since the plunge of December 18, 19 (more than 28 billion US dollars). Judging from the bitcoin volatility premium provided by Coinmarketcap, January 3 and January 8 of this year are the highest since December 18 last year.

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Figure 3: Bitcoin's daily trading volume over the past 7 days. Data source: Coinmarketcap

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Figure 4: Bitcoin's volatility premium over the past 7 days. Data source: Coinmarketcap

Just looking at the correlation of prices, investors may conclude that there is a correlation between gold and Bitcoin. However, these data alone are not enough to draw this conclusion.

What is the correlation between Bitcoin and gold investment returns?

Compared with the correlation between Bitcoin and gold prices, the correlation between the two asset returns is much weaker, and the overall sample has only a 2.2% correlation. The correlation between the two asset returns has increased from 8.7% in 2018 to 12.5% ​​in 2019, an increase.

The lagging return correlation of the two assets has similarly changed between 2018 and 2019. The correlation of the overall sample is -2.3%, the correlation in 2018 is -4.7%, and the correlation in 2019 is positive 2.3%. Based on this analysis, we can assume that there is no correlation between the returns of Bitcoin and gold.

Gold price changes will not affect Bitcoin

Let's see if we can explain Bitcoin's rate of return through a regression model of gold rate of return. By analyzing the income sample, when gold rose 1%, Bitcoin rose to 0.115%.

However, the above results are not statistically significant, that is, it is impossible to confirm whether there is a correlation between the two assets. When regression analysis is performed on the lagging returns of Bitcoin and gold, it will be found that there is a negative correlation between them, and this negative correlation is not statistically significant. From the above analysis, we can assume that changes in the price of gold will not affect the price of Bitcoin.

Is there a correlation between the price movements of Bitcoin and crude oil?

Bitcoin has been compared to commodities, but when Bitcoin is compared to crude oil, some of Bitcoin's basic assumptions (fixed supply and high volatility) make people wonder if it belongs to commodities.

In the recent conflict between the United States and Iran, WTI crude oil prices rose 2.86% from January 2 to January 7, and Brent crude oil prices rose 3.9%. The trend of crude oil futures prices also rose.

Analysis of data from April 2013 to December 2019 shows that there is a negative correlation (-13.5%) between the price of crude oil (WTI) and the price of Bitcoin. Contrary to previous research results, the correlation between crude oil and Bitcoin prices has been declining from 2018 to 2019, from 22% in 2018 to -3.7% in 2019.

Bitcoin and crude oil investment returns also show a negative correlation, with an overall sample of -2.5% and -3% in 2019. The correlation in 2018 was better than in other periods (1.8%).

Let's look at the correlation between the lagging returns of WTI crude oil and Bitcoin. 2018 and 2019 are negative correlations. The correlation of the overall sample is 3%, which is higher than the correlation between Bitcoin and gold returns.

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Figure 5: WTI crude oil prices from April 2013 to December 25, 2019

By analyzing the regression model of WTI crude oil returns, we also have no significant results to prove that crude oil returns can predict the returns of Bitcoin.

The normal and lagging returns of Bitcoin and crude oil are negative, while the coefficients of normal return of gold and gold are positive, which indicates that the relationship between crude oil and Bitcoin is completely opposite.

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Figure 6: Cumulative return on investment in gold, crude oil, and Bitcoin from April 2013 to Christmas 2019

Bitcoin: Is it a commodity or an asset?

The classification of Bitcoin is still an open question. In the short term, during a week of highly geopolitical instability, Bitcoin and gold, crude oil and other commodities performed similarly. Traditional stock indexes, such as the S & P 500 and Dow Jones, have the opposite performance.

The above data shows that from a wider time period, the correlation between Bitcoin and gold is not large, and the correlation with bitcoin is lower.

In the long run, considering the example used in Figure 6, Bitcoin still offers investors better investment options compared to investing in gold or crude oil. A Cointelegraph report last December showed that the price of Bitcoin has increased by almost 9 million over the past 10 years, surpassing all other investments.

However, the factors affecting Bitcoin price and earnings are not certain. At the same time, in a period of economic uncertainty, more and more traders may consider Bitcoin as an asset that is not related to traditional stock indexes, as shown last week when the US-Iranian relationship was tense, Bitcoin is more like a A safe-haven asset. Cointelegraph has previously reported that some mainstream media are beginning to believe that Bitcoin is a politically neutral asset.

Last week, the Nikkei Asian Review mentioned when talking about US-Iran relations:

With no national intervention or geopolitical risks, cryptocurrencies have become 'digital gold' as Iran's tensions escalate.

If bitcoin is adopted by more and more individuals and businesses in the future, it will have an increasingly obvious negative correlation with traditional markets and commodities. Whether this evolution will bring Bitcoin closer to a commodity, currency, a purely speculative asset, or a completely new asset class remains to be seen.