…[Bitcoin buy and sell] decisions are based on what traders think someone else believes bitcoin to be worth in a specific moment, which is, in turn, based on that person’s beliefs about other people’s psychology…[As such, it would be] wise [for traders] to use any kind of hedge that they can find and, over the past few months, one such hedge has been, ironically, physical gold…[Below, for example, are 2 examples of the negative correlation between gold and bitcoin:
- when, late last year…the bitcoin price cratered 50%, barely maintaining the $3,000 level heading into mid-December, gold rallied from $1,210 per ounce to $1,338 all the way into February.
- If one had purchased an equivalent absolute dollar amount of each, meaning about a 5-to-1 ratio of gold to bitcoin, a $3,000 BTC loss would have been offset by about a $635 increase in gold. That’s nearly a 20% return.
- when gold topped out in late February bitcoin ran from $4,000 to about $9,000 earlier this month (It has since exploded above $11,000 to set a new yearly high) while gold, meanwhile, fell from $1,338 to $1,270.
- In this case, a 3-to-1 ratio of gold to bitcoin – representing the same $4,000 investment – would have yielded a $5,000 bitcoin gain offset by a $200 gold loss.
Were one still invested…with the original $6,000 from November, the bitcoin gain would have been around $3,000 prior to the weekend rally. Gold’s still up $600 or so, for $3,600 total. That’s a 60% return.
Gold has not traditionally been inversely correlated to bitcoin (gold is usually inversely correlated to the dollar)…so the above may suggest a way for crypto investors to hedge against an ever-volatile bitcoin price in the future. It’s still too early to tell, but the relation of gold prices to interest rates may also foretell a possible relationship between the Fed’s interest rate policies and the leading cryptocurrency.