Published: December 18th, 2024
As large investors make a year-end move to extend holdings and exposure to the world’s number one cryptocurrency, Bitcoin’s latest price spike has edged its ratio against gold to record highs.
The BTC-to-gold ratio measures how many ounces of gold one Bitcoin can buy. On Monday it shot up to 37.3, a new high. The change means one BTC can buy a bit more than 37 ounces of the yellow precious metal.
The ratio is about half a point north of the level reached during the height of crypto’s last full-scale bull run in November 2021. At that time, it reached 36.6.
An analysis published this week by Coinglass said the new high ‘signals that traditional finance continues to see Bitcoin as a mature asset class. The ratio has grown in part due to the steady rise on Bitcoin ETF inflows. BTC is increasingly seen as a necessary component of a modern balanced portfolios.’
The ratio is calculated by dividing the current price of Bitcoin by the spot price of a single ounce of gold. Analysts and investors use it to compare the relative strength of the two assets, as well as associated investor demand.
Coinglass analysts said the rising ratio ‘cements Bitcoin's role as a sort of digital gold that investors are increasingly looking to as a reliable store of value.’
The note does warn however that traders tend to shift back to gold whenever Bitcoin enters a period of uncertainty. That effect may be more muted in future as BTC’s volatility now tends to correlate with traditional markets, thanks in no small part to the SEC’s approval of Bitcoin exchange-traded funds this year.
The last big shift in preference from gold to Bitcoin took place in October 2022, when investors reacted positively to a period of gold-price market correlation.
Analysts at Bank of America Securities (BofAS) published a report saying that the world’s number one cryptocurrency had been tracking gold prices for an extended period, strongly indicating that investors had been using it as a hedge against broader market volatility.
To be considered a safe haven, a financial asset must be able to shield portfolios from steep losses during an economic downturn. That requires them to be uncorrelated or negatively correlated from trends in the wider economy. Gold has traditionally played this role, providing a sturdy store of value in times of trouble.
The relationship between BTC and gold has historically been used to measure investor confidence in Bitcoin’s store-of-value credibility. Both moved broadly in parallel between June 2021 and March 2022. There was always a level of deviation, but the correlation turned negative in April of that year.
If two or more assets demonstrate a positive correlation, they can be assumed to be responding to the same market stimuli. If they demonstrate a negative correlation, then the opposite is likely true.
At the end of August 2022, the relationship between gold and BTC returned to positive. Then in early October the correlation wound even tighter, touching the highest point seen in the previous twelve months.
Within that time frame, Bitcoin’s relationship to the S&P 500 and Nasdaq 100 indices of blue-chip equities also reached all-time highs, though BoAS analysts said that correlation had begun to slip.
'A slowing positive correlation with blue chip stocks and a quickly rising correlation with gold tells us that investors have started looking at bitcoin as a relative safe haven to shield portfolios from macro uncertainty and wait for the market bottom to materialize.’
Toward the end of October 2022, new data showed that Bitcoin had become more stable than both the Nasdaq and S&P 500 for the first time since 2020. BTC's 20-day volatility had followed the peaks and troughs of the Nasdaq stock index for the first time in nearly two years. While Bitcoin’s price had been more or less the same since the beginning of September, both the Nasdaq and the S&P 500 have dropped by around 11 per cent through the same period.
Bitcoin's price has historically been correlated with technology stocks, though with a higher propensity for volatility. Despite the impressive gains posted in the late-2021 bull run, its high beta rating had previously kept many investors from relying on it as safe-haven asset.
Its price did fall back to lows last seen in 2020 in the first week of October 2022, after core US inflation topped another 40-year high. Both BTC and stick prices fell on the news before returning to their previous ranges.
Bitcoin suffered a price drop in June 2022 after American CPI data for May showed core inflation rising at a worrying rate of at 8.7 per cent. Investors took it as a signal that the US Federal Reserve wouldn’t be altering its then aggressive monetary policy course any time soon, prompting a shift away from riskier assets.
However, while high inflation held firm for months, crypto’s price action didn’t spike or dip with subsequent updates to the consumer price index (CPI) inflation measure. Stocks, on the other hand, remained in a slow-but-steady decline.
Bitcoin move into a stable mode was all the more notable against the hawkish stance taken by central banks worldwide, which had turned government bonds into a policy vehicle for making rapid gains. As Reuters reported in September 2022, US Federal Reserve rate policy had sent bond yields skyrocketing.
Reuters noted that treasury market volatility had been much higher than Bitcoin volatility in the third quarter of that year. At the time, volatility in stock prices hit all-time highs when compared to price moves for Bitcoin.
As global assets demonstrated weakness against the Greenback across the board, even the United Nations asked the Fed to ease off on further rate rises, as they can impact emerging market economies negatively.
