Asset Allocation Weekly: Has Bitcoin Become a Gold Substitute?

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Confluence Investment Management offers various asset allocation products which are managed using top down or macro analysis. We publish thoughts on asset allocation on a weekly basis in this report, updating the report every Friday, with an accompanying podcast.

One of the most dramatic developments in finance over the past half decade has been the adoption by investors of cryptocurrencies such as Bitcoin. Once viewed simply as an exotic technology of little relevance to investment wallets, Bitcoin has now grown into a popular investment tool. One of the reasons for its popularity is that some investors view Bitcoin and other cryptocurrencies as a substitute for gold and other precious metals in the face of currency depreciation implied by fiscal and monetary policies. lax today. This report takes a quick look at whether Bitcoin can truly be considered a substitute for gold.

Although Bitcoin was invented in 2008, we rely on price data from the Coinbase cryptocurrency exchange from 2015 when Bitcoin trading really started to take off. As shown in the graph below, Bitcoin prices and gold prices have both increased from early 2015 until today. Over the entire period, the weekly Bitcoin and Gold prices had a positive correlation of around 0.71. Likewise, a simple regression model relating Bitcoin prices to gold prices suggests a strong positive relationship between the two. In this model, the weekly variation in gold prices explains almost half of the weekly variation in Bitcoin prices.

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Even though Bitcoin and gold prices have both risen over the past six and a half years, Bitcoin has often deviated widely from the gold price trend, and our analysis suggests that the relationship between two assets recently reversed. As the chart below shows, actual Bitcoin prices since mid-2020 have diverged widely from what the long-term relationship would suggest.

Importantly, a shorter-term pattern linking Bitcoin prices to gold prices only from August 2020 to today suggests that their relationship has reversed, most likely because investors now consider Bitcoin as a real substitute for gold rather than just a complementary asset as in the previous period. . As of August 2020, the correlation between Bitcoin and gold prices is -0.80, suggesting that rising Bitcoin prices are now associated with falling gold prices. A short-term regression model spanning August 2020 to present not only confirms that the two asset prices are now moving in opposite directions, but the model also better explains the evolution of Bitcoin prices. A version of the short-term model using gold prices was delayed for four weeks and explains almost 70% of the price change in Bitcoin.

This evidence suggests that as Bitcoin trading grew and more investment funds were funneled into the asset, it took on the characteristics of a gold substitute. At first glance, this makes sense. As global fiat currencies are increasingly threatened by lax fiscal and monetary policies, the limited supply of Bitcoin gives the impression that it could hold its value, as does the limited supply of gold. This is because Bitcoin has even more attractive characteristics than gold, such as being much easier to transfer between investors and cheaper to hold (you don’t need a warehouse or security guards for your Bitcoin afterwards. all !). All the same, we
thinks investors should be wary of trying to substitute Bitcoin for gold. As we saw in China last week, governments concerned with preserving their sovereignty and issuing their own central bank digital currencies could ban Bitcoin and other cryptocurrencies at any time or at least impose onerous regulations that would undermine their value. In other words, investors looking to hedge against currency depreciation should likely continue to favor gold and other precious metals over cryptocurrencies.


Past performance is no guarantee of future results. The information provided in this report is for educational and illustrative purposes only and should not be construed as individualized investment advice or a recommendation. The investment or strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial situation. The opinions expressed are current as of the date indicated and are subject to change.

This report was prepared by Confluence Investment Management LLC and reflects the current opinion of the authors. It is based on sources and data believed to be accurate and reliable. The opinions and forward-looking statements expressed are subject to change. This is not a solicitation or offer to buy or sell securities.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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