Investors are currently fleeing bitcoin and gold amid a strengthening US dollar and rising interest rates. This has had a negative impact on both the world’s largest crypto and the precious metal.
As a result, the correlation between the two has reversed, reaching its highest level in more than a year.
Bitcoin and Gold Correlation
Over the past year, bitcoin has been largely uncorrelated with gold. Its correlation ranges between negative 0.2 and positive 0.2. But this year has been particularly jarring for both cryptocurrencies and traditional markets.
Several narratives have been broken, including bitcoin being hailed as a “digital gold” and an inflation hedge similar to the yellow metal. In fact, both BTC and gold have seen significant declines in value as inflation hit record highs.
While tightening global monetary policy dragged bitcoin down more than 70% from its all-time high last November, gold lost 10% of its annual gains. Blame it on a series of aggressive rate hikes in the US this year, which have dented the unprofitable metal’s appeal.
Gold did not act as a safe haven asset, although underlying inflation remained consistently high. This resulted in a year-high correlation of +0.4, representing a change in market structure, according to Kaiko Research.
2022 Investor confidence shaken
Bitcoin appears to have largely lost its inflation hedge and store-of-value narratives in the market despite a fixed supply and tight monetary policy. Currently, investors are attracted to low-risk assets, and according to market experts, cryptocurrency is still considered a newer and more volatile asset to be a hedge, although it is considered highly profitable for medium and long-term investors . .
On the other hand, a high hashrate, dominant cumulative sentiment among long-term holders, low exchange supply, and expanding institutional interest may prove beneficial for a potential BTC rally.
For gold to recover, on the other hand, the market would have to reach peak hawkishness. Ole Hansen, Head of Commodity Strategy at Saxo Bank, in a recent note, stated:
“Gold and other semi-investment metals such as silver and platinum will likely remain under pressure until the market peaks in hawkishness, potentially not before 4% is reached in 10-year yields and the dollar squeeze remaining short positions. It remains to be seen whether the tipping point will be reached before the end of the year.”
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