The exchange rate of bitcoin and gold: how they compare and which is more profitable as an investment

Often on the Internet you can see how bitcoin is called “digital gold”. Is there any relationship between the prices of these two assets?

Analysis of the movement of gold and BTC prices

So, if we try to consider the dynamics of prices over a long period of time, then we will practically not find a correlation between the two assets. However, in certain periods, the prices of conventional and “digital” gold follow a single trend. Let’s take a closer look at what are the reasons for such a movement and is there a correlation between them?

Change in the price of gold

Since historically the first cryptocurrency appeared 14 years ago, analyzing the course of the precious metal, we will not go deep into the history and times of the “gold standard”. Consider the change in the price of gold over the past few years. So, in “pre-pandemic” times from October 2018 to mid-February 2020, the cost of an ounce of precious metal soared from $1,200 to $1,600. In other words, gold became more expensive by a third, in just over 15 months.

However, the volatility of the precious metal turned out to be low. For 15 months, the weekly price change has only exceeded 4% by several times. So an overall gain of 33% is not bad for an asset that is considered “protective” and, according to some investors, does not carry much risk.

The beginning of the pandemic had an extremely negative impact on the situation in the markets and the economy as a whole. This also affected gold, but to a much lesser extent. In just a couple of weeks, the price fell by 14.4% to $1,450 per ounce. However, then things took off. Already in April, gold cost more than $1,750, and by August it had overcome $2,000 per ounce.

Thus, the COVID-19 pandemic, having caused an initial shock, subsequently became a catalyst for the growth of quotations by more than 27%. Many, against the backdrop of an unstable economic environment, tried to protect their savings in traditional and time-tested financial instruments.

A source: tradingview.com

Further, investors’ enthusiasm for gold diminished. By the end of March 2021, its value had dipped by more than 18% from the highs of August 2020 and dropped below $1,700. Only in March 2022 did the price reach August 2020 levels. Thus, we can say that in 20 months the price of gold has not changed much, if you do not take into account that it first fell and then rose back.

In general, there is nothing unusual in such fluctuations in the precious metal rates. But the general trend and the fact of price growth from March to August 2020 are interesting.

It is also noteworthy that in September 2022, the price of gold fell to just over $1,600, the same level that was the starting point of growth in 2020. By and large, then it was resistance, but it became support. In January 2023, the price overcame $1,900 and there are no signs to stop there yet.

2022 has been a particularly difficult year for the economy and the financial sector. Inflation also played a role, reaching peak levels in several years. All this led to a decrease in the price of gold and a number of other “protective” assets. It can be assumed that something similar was observed in the second half of 2020 and early 2021.

Perhaps, for some, the return to the price exceeding $1,900 came as a surprise, although from the point of view of technical analysis, everything is quite understandable. Yes, and the fundamental prerequisites have not changed: gold remains a “safe haven”, a protective asset in times of recession and economic instability, when investors expect, if not to earn, then at least to minimize possible losses.

BTC price change

But the price of bitcoin right before the start of the pandemic did not show dizzying growth. From July to December 2019, the price of digital gold fell by more than $7,000, from $13,880 to $6,425. This was followed by a rebound to the $10,000 region.

Interestingly, the pandemic has affected the BTC price just as negatively as it has affected gold. Only the drawdown of the first cryptocurrency in terms of capitalization turned out to be much more significant – more than 60%.

Further, in April 2020, like gold, bitcoin began to win back losses. However, the growth was not so rapid, and the cryptocurrency returned to “pre-pandemic” levels only in June. Finally, the bullish trend was established in BTC only in November, when the high of July 2019 was exceeded, and later the “psychological threshold” of $20,000 was taken.

The bull market in 2020 and 2021 can be roughly divided into two phases: the first from November 2020 to April 2021, the second from mid-July to early November 2021.

Almost all of 2022 has been a bear market. Since November, there have been signs of a “thaw” and an impending trend change. By January 23, 2023, the price of BTC has increased by more than 50%. And although the percentage is impressive, the movement in bitcoin itself is much less impressive than in gold. This is due to the completely different volatility of the two assets.

A source:
tradingview.com

Correlation of gold and bitcoin prices

If we talk about the direct dependence of the price of one asset on the price of another, then it most likely does not exist. You probably won’t be able to look at a gold chart and draw an unambiguous conclusion about what will happen to BTC and vice versa. However, sometimes there are similarities in asset price behavior.

The first period of time is the recovery of markets after the start of the pandemic.

Between March and April 2020, the US Federal Reserve is running the printing press and issuing massive amounts of money. This immediately affects the level of inflation and, as a result, the price of gold. The precious metal has been steadily growing in value for 5 months – until August. In turn, BTC reacts more restrained.

However, at the end of 2020, Bitcoin also moves to growth. Of course, the time intervals do not match for assets, but the trend of movement is the same. By and large, the whole difference lies in several factors. Firstly, the growth of bitcoin has gone through two phases compared to one for gold. Secondly, it started with a delay of several months (meaning the overcoming of previous highs, since the growth from the lows coincided with the growth of gold). Thirdly, the amplitude of price changes was different, which can be explained by the difference in the volatility of assets. Fourthly, there are fundamental factors that have an additional impact on the long-term rate of bitcoin, namely: the schedule of upcoming halvings, the level of the network hashrate, the negative news background on bankruptcies of individual players in the crypto industry, and others.

In the movement of the price of gold, two phases can also be distinguished, notes cryptonomist. However, in time they will not coincide with those of bitcoin due to the above reasons. The second phase falls at the end of 2022 and is caused by geopolitical events.

In addition, you can see some distant similarities in the 2022 decline in both assets. Of course, in bitcoin it was much more painful and larger in scale, but the trend took place.

If we generalize and do not take into account the fact that the volatility of assets is different, and therefore the jumps in prices too, then repeating patterns can be seen for both assets: first growth, then a fall, then again growth, similar to the first.

And yet, there is no need to talk about a literal direct correlation. First, the events do not coincide in time. Secondly, if there was a real collapse in bitcoin, then in gold it was rather a small correction. Thirdly, the prices for the precious metal are relatively close to their peak values, while BTC needs to grow three times to reach its historical maximum.

What affects prices

Gold and bitcoin are two different assets, ranging from the physical difference to how the price of each changes. And yet there is a nuance that has a serious impact on the value of both instruments – the Fed’s monetary policy.

It can be seen with the naked eye that in the long term, both gold and bitcoin are growing. In contrast, by the way, from the dollar. In addition, there is a fairly clear trend: if the dollar is strong, then gold and BTC are falling, and vice versa.

This is confirmed by the facts. Take at least November 2022. Then the dollar weakened (not relative to the ruble), and gold got stronger. BTC, on the other hand, was unable to grow similarly, as the crypto market was in a fever from the bankruptcy of FTX.

Digital and regular gold

But why do the prices for these instruments differ from the dynamics of the dollar? In a sense, both are its direct competitors. The dollar, like other state fiat currencies, is characterized by inflation in the long term due to unlimited emission. Gold, on the other hand, is considered as a protective asset, primarily as an item that allows you to avoid the costs associated with inflation. Bitcoin conceptually opposes itself to a fiat centralized currency with unlimited supply. The emission of BTC is strictly limited, and as the reward for new blocks found is reduced, no more than 21 million bitcoins will be mined. Therefore, many crypto enthusiasts call BTC “digital gold”.

Summing up, we can say that both assets primarily oppose traditional fiat currency and seek to minimize the risks associated with inflation and an unstable economic environment. Gold in this regard has much less volatility and belongs to the class of protective assets. Bitcoin, on the other hand, is highly volatile and its exchange rate depends on a number of factors, including market ones, such as bankruptcies of large companies. Therefore, bitcoin may not provide unequivocal protection against the background of a recession or instability in the market, at least during its deep correction and the so-called cryptozymes.

What does this mean for investors

Investors by and large don’t care if the assets are directly related. For them, the main thing is to preserve and increase their hard-earned money. Let’s consider two examples.

Since the beginning of November 2022, gold has moved to growth. In less than three months, the price of one ounce of the precious metal rose by a little more than 17.6%. During the same period, the price of bitcoin rose by almost 50%. Thus, investing in gold was a profitable investment, but investing in BTC was just a “grail”.

Now let’s move on to the periods of decline. From March to September 2022, the price of gold fell by 22%. Over the same period of time, bitcoin has declined by more than 50%. Thus, the rate of BTC fall was more than twice as high. What conclusion can be drawn from all this?

It all comes down to the fact that, as mentioned above, bitcoin is more volatile compared to gold. During periods of growth, the potential profit will be greater. However, if “winter is coming”, then the price of BTC will fall much faster than conservative gold followers.

The two examples above are taken on purpose to coincide with time periods where the dynamics of both assets will be the same. In fact, this is not always the case. There may be periods when gold rises and BTC falls, and vice versa. In this case, it is more profitable to take what grows. If you are a trader and the exchange gives you short trading, then what is falling. In general, if you want to make money quickly, then BTC will be more suitable for your goals – buy when it rises, short when it falls. Remember that any short can end in zeroing your deposit.

This material and the information in it does not constitute individual or other investment advice. The opinion of the editors may not coincide with the opinions of the author, analytical portals and experts.