Is Bitcoin The New Gold?


A correlation emerged between gold and cryptocurrency prices late last year as investors started trading gold for bitcoin. Analysts expect the trend to continue, despite the recent drop in bitcoin's cost.

Thomson Reuters analysts, in their own 2017 Gold Survey released in January, noted the rising cryptocurrency prices in December diverted significant amounts of capital from precious metals. The report stated retail investors have a shorter investment horizon nowadays, and many were unable to resist the temptation to get on board with cryptocurrency.

Christopher Louney, RBC Capital Markets strategist, said the development — a possible correlation between gold's worth and cryptocurrency prices — is fairly recent, reports Fortune. He said he's noticed a potential correlation between gold's worth and cryptocurrency prices.

While there was no relationship previously, Louney said the tendency emerged late in 2017 and lasted into early 2018--indicating that as bitcoin's price soared in quadruple digits, investors might have been offloading gold to buy cryptocurrencies.

Louney stressed the correlation is modest — maybenot enough to move gold costs, and not enough to say that investors are currently considering bitcoin as gold's replacement. The macroeconomic factors that have traditionally affected gold prices continue to dominate the playing area, such as stock market performance.

Louney said he expects gold prices to end the year lower than they began, around $1,303 on average for the year, mainly due to rising equity returns.

A Long Road Ahead

Bitcoin, besides being volatile, is still a relatively unknown asset compared to other investment assets. Gold, in contrast, is well established with institutional investors and has plenty of liquidity.

While bitcoin trading volumes totaled to just over $3 billion in daily trading lately, gold trading volumes reach $250 billion a day, according to the World Gold Council.

The bitcoin-gold correlation could increase over time, said Looney. The growing relationship also means the converse could happen, whereby bitcoin investors cash in their cryptocurrency in hard times for gold as a less volatile asset.

In a report delivered to the bank's customers in January, Goldman Sachs analyst Zach Pandl wrote that the rapid increase in demand for bitcoin has been triggered by the rising dissatisfaction with controlled monetary systems and the current banking infrastructures.

In the long term, as cryptocurrencies mature and evolve into a major asset class, Pandl said electronic currencies such as bitcoin will pose lower returns but demonstrate a high level of stability, such as gold and other safe-haven assets.