Published: October 26th, 2022
Investors may be viewing view Bitcoin as a safe haven asset again after a period of gold-price market correlation.
Analysts at Bank of America Securities (BofAS) have published a report saying that the world’s number one cryptocurrency has been tracking gold prices for an extended period, strongly indicating that investors have 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.
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, the relationship between gold and BTC returned to positive, while in early October the correlation wound even tighter, touching the highest point in twelve months.
Within that period, Bitcoin’s relationship to the S&P 500 and Nasdaq 100 indices of blue-chip equities also reached all-time highs, though BoAS analysts say that correlation has begun to slip in the last fortnight.
'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 materialise.’
In mid-October, new data showed that Bitcoin had become more stable than both the Nasdaq and S&P 500 for the first time since 2020.
October has been mostly uneventful for BTC, which at time of writing is up just 1.1 per cent over the previous month.
While crypto as an asset class has a well-earned reputation for volatility, Bitcoin looks to have settled into a period of relative calm.
Data released last week found that 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 has 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 than other assets. Despite the impressive gains posted in 2021, 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, after core US inflation topped another 40-year high. Both BTC and stick prices fell on the news before returning to their previous ranges.
The drop seen in June followed the release of American consumer price index (CPI) data for May, which 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 aggressive monetary policy course any time soon, prompting a risk-off move that shifted money away from riskier assets.
However, while high inflation has held firm for months, crypto’s price action hasn’t surged or plunged with subsequent updates to the consumer price index (CPI) inflation measure. Stocks, on the other hand, have been in a slow-but-steady decline.
If Bitcoin really has moved into stable mode, it will be all the more notable against the hawkish stance taken by central banks worldwide, which have turned many bonds into an opportunity for rapid gains. As Reuters reported in September, Fed policy has sent bond yields skyrocketing.
Reuters noted that treasury market volatility has been much higher than Bitcoin volatility in the third quarter. At the time, volatility in stock prices hit all-time highs when compared to price moves for Bitcoin.
As global assets demonstrate weakness against the dollar across the board, even the United Nations has asked the Fed to ease off on further rate rises, as they can impact emerging market economies negatively.
Despite experiencing its own slump after the highs of the 2021 bull market, NFT investors are still finding opportunities for gains. In July the CryptoPunks NFT collection saw its floor price surge following two multi-million-dollar sales in rapid succession.
In mid-July the collection’s floor price on secondary marketplaces jumped to above USD 100,000 for the first time since the crypto crash began in mid-May. Data from NFT analytics firm Price Floor showed the floor price for CryptoPunks at 84.84 ETH. That means the entry-level price had leapt by more than 30 per cent in a week.
The rising value of Ethereum is part of the story. However, when measured against ETH, the CryptoPunks floor beat Ether's rise by nearly 26 per cent over the past month.
So far, it doesn’t signal a market-wide uptrend for high-value NFTs. Hugely popular collection Bored Ape Yacht Club, for example, has seen its floor price fall in recent weeks.
An NFT is a blockchain token that indicates proof of ownership for another asset, typically a digital product like a unique online profile picture, and sometimes an artwork, collectible, or video game item. The NFT market reached USD 25 billion in trading volume last year, adding roughly USD 20 billion more for the 2022 year-to-date.