The correlation between Gold and Bitcoin has increased in recent months. This pattern could be related to economic tensions worldwide. Different analysts suggest that both Gold and Bitcoin are being used as refuge assets.
Bitcoin as a value refuge
As a result of the economic problems faced by countries of different latitudes, an increase in the cryptocurrency market has been observed, which could translate directly into an inflow of capital, by the masses and many investors who have decided to take refuge in the assets of that market, to safeguard its value in view of the consequences of a possible global economic crisis.
Bitcoin is decentralized, it is not governed by any person or authority. The supply and demand of the market are what determine its price. In countries where monetary policies are a limitation, where the general population may not have access to banking services, the volume of Bitcoin trade has continued to increase, even when the price is falling. Global economic problems are inducing the use of cryptocurrencies as a refuge.
This phenomenon is not new, in economies where inflationary problems have developed that leave context, such as Venezuela, the use of Bitcoin as a reserve of value has become common. Many experts insist that the volatility of the price of cryptocurrencies does not make them efficient as a safe haven of value, however this has not been a limitation for people and enterprises to turn to these assets as a refuge. The facts seem to indicate that investors are losing fear of the volatile nature of cryptocurrencies.
Today the cryptocurrency landscape has changed a lot, people are being more open to technology because of the need to save their value and the ease of access that cryptos offer. It was evidenced that the decentralized structure of Bitcoin provides important protection against government manipulations.
The global economic crisis that many experts warn, as well as volatility in the stock market, will catalyze the transition to digital currencies.
Bitcoin is the digital gold
The Gold and Bitcoin markets have had similar behaviors in recent months, which reinforces the theory that the increase in the crypto market is because people are using cryptocurrencies as a refuge, considering that gold has been for excellence throughout history.
When two markets have a correlation of one (1) between them, they mean that both have exactly the same behavior. If this figure is expressed in a negative one (-1), it means that the two assets have totally opposite market behaviors. Bitcoin since May has increased its correlation to 0.827 (for last year it was 0.496), that is, both markets have similar volume and value variations during the same time periods.
At the same time, difficulty levels to mine blocks have increased significantly. The Bitcoin Blockchain registered a new record in its hash levels by the end of July.The difficulty is currently at its highest point compared to the month of September 2018, at which time it registered its highest peak.
Bitcoin seems to be developing a place among refuge assets, as correlation movements show this year. It is becoming a viable alternative asset. It does not represent an alternative to gold, but a complement to it.
Stock to flow ratio
It is another aspect to consider when talking about the value of an asset and its ability to maintain it over time. The Stock to flow ratio is what makes a refuge value considered valid, it represents the amount of something that is in the market with the amount that is produced from that something currently.
When the stock to flow ratio is high it is because the quantity that is in the market is much higher than what is produced. Today, Bitcoin is 4%, within a year it is the Bitcoin halving, a process by which the mining difficulty is doubled and therefore the reward is divided to half of the current one, which would place its stock to 2% flow rate, equal to gold. And so every 4 years making it increasingly scarce and therefore more expensive, that way the Bitcoin deflationary system works, having less, there will be more demand and less supply which will result in the price rising.
What lies ahead
The growing correlation of Bitcoin with gold, the devaluation of China’s yuan, Brexit, the global monetary weakening of numerous central banks and the negative yields of bonds are driving investors to consider Bitcoin as a protection against volatility.
The current macroeconomic landscape is creating the perfect circumstances for the adoption of Bitcoin and cryptocurrencies. By 2020, an increasingly populist and politically unstable society is expected to provoke the need to safeguard its value.
In the upcoming months, as long as the setbacks continue to impact the global economy, central banks will continue to print money, the case of cryptocurrencies such as Bitcoin, whose supply is limited will be further strengthened.
In the long term, the only foreseeable solution to prevent hyperinflation is a monetary system based on blockchain.