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Bitcoin and Gold Correlation Gets Stronger Despite Global Turmoil

Bitcoin and gold march hand in hand

In 2023, Bitcoin and gold have shown a remarkable alignment in performance, particularly against the backdrop of global geopolitical unrest and escalating interest rates. This phenomenon marks a significant shift from their historically inverse relationship with interest rates, challenging the traditional dynamics of risk assets. Fidelity's analysis reveals that despite a global rise in interest rates, both Bitcoin and gold have not only maintained stability but have also experienced notable rallies. This trend suggests a decoupling from previous patterns, driven by complex market factors beyond mere speculation.

Analyzing stunning gains of Bitcoin and gold in 2023

In a year marked by significant economic shifts, Bitcoin and gold have both displayed exceptional resilience and growth. Fidelity's report highlights that gold's performance, when measured in U.S. dollars, saw an increase of 14.6% in 2023. This surge reflects the metal's response to varying geopolitical risks and the consistent demand from central banks. Similarly, Bitcoin's journey in the same period has been even more striking, with a remarkable 156% gain. 

Fidelity:

“Historically, bitcoin has been relatively noncorrelated to gold over the longer term, but recently has shown an increase in correlation as both have rallied,”

This parallel rise in both assets underscores a newfound correlation, diverging from their historical trend of non-correlation.

The simultaneous strength of Bitcoin and gold in a landscape of fluctuating currencies and uncertain economic policies indicates a deeper market sentiment. This trend may be reflective of investors' growing apprehension towards traditional financial systems and their shift towards what they perceive as more reliable assets in times of instability.

Underlying factors that impact the correlation between Bitcoin and gold

The recent alignment between Bitcoin and gold has sparked speculation among financial analysts. Fidelity's examination suggests several potential causes for this increased correlation. One theory posits that both assets are reacting to the U.S. bond market's current stance, which may not accurately reflect the broader economic reality. Another possibility is that these assets are early indicators of the U.S.'s growing fiscal deficits.

“We can only speculate as to what these real asset markets may be saying, but one possible explanation is that both Bitcoin and gold are saying that the bond market may be wrong or that both assets are sniffing something else out, such as the United States’ increasingly large and structural fiscal deficits. Perhaps the bitcoin market may be anticipating more debt monetization by the Federal Reserve in the future, or anticipating rate cuts, given that our research shows that Bitcoin’s price is highly correlated not to consumer price inflation, but rather inflation in the money supply itself and various liquidity metrics.”

Interestingly, Fidelity's analysis emphasizes that Bitcoin's price movement correlates more closely with inflation in the money supply rather than consumer price inflation. This perspective points to Bitcoin possibly anticipating future actions by the Federal Reserve, such as debt monetization or rate cuts. The consistent behavior of Bitcoin and gold in this context could be hinting at a broader economic sentiment, where investors are seeking refuge in what they consider more tangible or 'real' assets.

Long-term holders strengthen Bitcoin's market resilience

Fidelity's comprehensive analysis brings to light another significant aspect of Bitcoin's market behavior: the role of long-term holders. In 2023, the proportion of Bitcoin held by long-term investors reached a new peak, accounting for 70% of the total supply. This trend indicates a solidification of investor confidence, where holders are not swayed by short-term price fluctuations to sell, but rather show a commitment to holding onto their assets.

This steadfast approach by long-term holders, even in the face of a substantial 160%+ rally in Bitcoin's value, underscores a maturing market. Investors are not rushing to cash out at the first sign of a price surge, suggesting a deeper belief in the long-term potential of Bitcoin. This behavior contrasts sharply with traditional market responses, where a significant price increase often triggers a sell-off for profit-taking.