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Bitcoin to Gold Correlation Surges Amid Banking Turmoil, Surpasses Stocks

According to blockchain analytics firm Kaiko, Bitcoin’s correlation to gold reached its highest level in over a year in March.

The newfound correlation has occurred in the midst of a declining correlation to the stock market, indicating that Bitcoin may be on the verge of becoming a risk-off asset.

According to Kaiko’s report, the correlation between Bitcoin and gold is now 50%. Meanwhile, its stock market correlation is around 20%, and it has been declining since December.

“It’s a significant shift because Bitcoin and gold were mostly uncorrelated over the course of 2022,” Kaiko analyst Dessislava Aubert told Decrypt. “As a result, it was not moving at all as a safe haven [asset].”

Bitcoin bulls have frequently compared Bitcoin to “digital gold,” even hypothesizing that it could replace the precious metal as the 21st century’s safe haven monetary instrument. Bitcoin, like gold, is reliably scarce, divisible, and pure, but it also has the additional benefits of digitization that make it an effective form of money.

However, for a long time, the theory did not match reality. Throughout last year, bitcoin and cryptocurrency had a high correlation with the stock market, often exceeding 50%, as risk assets plummeted in the face of tightening interest rates from central banks around the world.

Simultaneously, correlations between Bitcoin and gold were frequently 0% or negative. This occurred as annual inflation reached multiple 40-year highs, a phenomenon that Bitcoin and gold are supposed to combat.

After banking fears swept through the United States, Bitcoin rallied to $28,000 and gold rose just shy of $2000/oz in mid-March. Following the joint closure of Silicon Valley Bank and Signature Bank, the Federal Reserve agreed to backstop all depositors and inject hundreds of billions of dollars of liquidity back into the banking system to prevent further bank runs.

Indeed, bank deposit outflows recently fell for the ninth week in a row, with large banks experiencing $129 billion in outflows last week, the highest weekly figure ever.

Bloomberg analyst Mike McGlone predicted last week that gold could break through its all-time high of $2000 if the banking crisis continues. Instability has already spread to Europe, where Credit Suisse was bought out by UBS following a bank run, and Deutsche Bank experienced a brief surge in the cost of its default insurance.

Similarly, Bitcoin bulls are ecstatic that macroeconomic conditions have aligned to relaunch the asset’s next bull market. BitMEX co-founder Arthur Hayes wrote an essay on the subject last month, arguing that the Federal Reserve’s Bank Term Funding Program will pump a similar amount of money into the economy as Covid relief, with a similar positive impact on stocks and crypto.

Former Coinbase CTO Balaji Srinivasan has staked $2 million on Bitcoin reaching $1 million in less than three months due to hyperinflation. Even Bitcoin Standard author Saifedean Ammous, who argues in his book that Bitcoin is superior to gold as a currency, is skeptical that this prediction will come true.

 

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