Bitcoin was rarely out of the headlines last year with its unprecedented rise in value, smashing record after record to end 2017 at $14,129. With Bitcoin’s value rising 13-fold in 2017, many have begun to think of the digital cryptocurrency as digital gold.
While most people relate Bitcoin with gold because of its potential as the new ‘safe haven’ asset, does this also mean that the two markets have a correlation?
A case of uncertainty
To figure out whether or not there will be a correlation between the price of gold and Bitcoin in 2018, we must first look through the factors that affect the prices of the two assets before examining projections for the year ahead.
Gold prices are heavily influenced by inflation rates, monetary policy, and the US dollar. The price of gold rises when inflation rates do, when central banks across the globe diversify their monetary reserves and accumulate more gold, and whenever the value of the US dollar falls. Moreover, another powerful indicator of gold’s price is the broad financial factor generally referred to as uncertainty. This is where gold’s reputation as a safe haven asset comes into play, in light of geopolitical anxiety, recession, and instability.
On the other hand, the relatively new market of Bitcoin currently doesn’t have mathematical mechanisms for accurate predictions and continues to be volatile in pricing. Be that as it may, those monitoring the cryptocurrency have pointed to three main factors driving the price of Bitcoin: media coverage, political risk, and regulation.
Markets Insider reported that Google searches for Bitcoin has a 91% correlation with the price of the cryptocurrency. Although, uncertainties over Brexit and the last US elections also contributed to Bitcoin’s rising prices. In terms of regulation, Japan’s decision to consider Bitcoin as legal tender led to an increase in Bitcoin’s price by 2% in just 24 hours, while the Chinese government’s ban on initial coin offerings sent Bitcoin prices plummeting by 29% in the same time period.
By far the most glaring common denominator between the factors affecting gold and Bitcoin prices is political risk and uncertainty. Coin Desk explains, however, that this common denominator is not enough to establish a meaningful relationship between gold and Bitcoin, especially when comparing a gold and Bitcoin correlation and overall market correlation.
A fleeting relationship
When examining price highs and lows for both gold and Bitcoin, it does indeed seem like the two have a direct correlation. Both increase in price in the midst of uncertainty or financial anxiety, presumably due to investors looking for assets to hold value. However, these rises and falls fail to be related once you factor out geopolitical events that really do tend to drive prices for everything, as the assets behave differently in their absence.
Experts share that this low correlation between Bitcoin and gold is largely due to their different market sizes and dynamics. Even with its more-than-impressive growth in recent years, Bitcoin still holds a relatively tiny market compared to gold. Also, the mechanisms that govern its growth – primarily the adoption of blockchain technology and the decentralized network of miners and developers that run it – are way too different from those of the more mature gold market. This makes correlation between the two assets not only absent where some have speculated its existence in the past, but also highly unlikely in 2018 and the near future.
The future of gold and Bitcoin
So what’s next for gold and Bitcoin heading into 2018? The price outlook for the former is looking strong this year, bolstered by the declining US dollar and rising inflation rates. Thus, investors are expected to enjoy a steady increase in prices in the year ahead.
Bitcoin, on the other hand, will not enjoy the same stability. Because of the still unresolved issues in terms of regulation, transparency, and disclosure, projections on the fate of Bitcoin in 2018 is as volatile as the digital currency itself. Some experts claim that the value could rise up to $60,000 while others predict a massive cryptocurrency crash to occur by the end of the year. Both can happen, of course, and Fortune Magazine stresses that there’s simply no way to be sure.
This uncertainty, of course, hasn’t stopped investors from jumping on to the Bitcoin bandwagon. Online trading platform Nadex is circumventing the cryptocurrency’s volatility and risk by allowing potential investors to trade the price of Bitcoin instead of Bitcoin itself. This allows traders to reap the benefits of Bitcoin’s rise in popularity and value, while limiting risk. Nonetheless, traders are advised to refrain rom investing more than what they can afford to lose.
Gold as a market has long been mature and mathematically predictable, but 2018 will be a defining year for the “digital gold” Bitcoin. Although the two do not currently have any strong correlation in terms of market behavior, market trends for gold and Bitcoin are still very much worth looking into in the year ahead.