Wednesday's Market Minute: Bitcoin's Gold Narrative Isn't Adding Up
The most common way to describe bitcoin is “digital gold.” It’s this simple, compelling catchphrase that’s allowed bitcoin to reach the far corners of the world. At $1.2 trillion in market cap, bitcoin is the backbone of the crypto trading ecosystem that’s set to debut in public markets today with Coinbase. Everyone knows gold. Now, everyone knows bitcoin. But there’s a problem: bitcoin shows little sign of evolving into gold.
According to the digital store of value argument, there is a future when bitcoin is fully adopted in which it will trade something like gold does relative to real interest rates and inflation. But it’s not going to happen instantaneously, of course. It will gradually fall into this role, so it follows that the bigger bitcoin gets, the more it should function as a gold-like asset, i.e., trade with some relationship to real interest rates, which determine the demand for a non-yielding store of value asset. At any specific snapshot of time, the two don’t have to be correlated; but the logic clearly demands that there should be a tightening correlation to real rates the bigger bitcoin gets.
The correlation with real rates should get more inverse, and with gold more positive. Bitcoin isn’t going to just suddenly start trading like gold one day, but it should develop these characteristics if people are buying it for that use-case.
So, I looked at the average 90 and 30-day correlations between bitcoin and real rates and bitcoin and gold going back to 2010. First, its relationship with gold remains completely random — hasn’t changed whatsoever over ten years. Now, there is some sign that bitcoin’s relationship with real rates trended more negative over the past three years, which is what you want for the “digital gold” narrative. Bitcoin’s average 90-day correlation with real 10-year rates steadily fell from 0.4 in 2016 to -0.4 by May 2020, but it’s still not a very strong one. And since the fall of last year, the relationship has broken down in an extreme way. Bitcoin’s correlation with real rates and gold is now the most out of whack it’s ever been, which means the story people are giving for buying it is less true than it’s ever been. It’s like if everyone is buying a company’s stock because they say its customer base is rising, but the user base is falling.
If gold were doing something unusual, we might be able to say that it’s about people converting from gold to bitcoin, but that’s not the case, as gold is trading precisely as one would expect based on its historical relationship to real rates. Yes, bitcoin can go through periods of adoption that are completely uncorrelated to anything else, but the fact there is no discernable progress in bitcoin’s relationship with real rates or gold over the past decade is damning evidence that no matter how popular the coin gets, no one’s treating it like gold. A narrative that broken begs for correction.
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