Gold: Bitcoin Ratio – A Flick and a Then a Fall, Bulls on Standby
‘Safe Haven,’ – These types of investments are not really meant to give hefty returns, rather they’re a gear down from high risk/reward ratio. Any other given day, it can be bought as a hedge against inflation or trade tensions. However, during times of extreme economic activity, the volatility (mostly demand) of these assets tend to increase.
Bitcoin is ‘safe’ in a different aspect, it’s security, storage, digital proof, permissionless governance, and limited supply. The transactions made on the blockchain are immutable and has no counterfeit risk. (If I were transacting in gold bars, the man could be selling coated lead and I won’t know the difference)
Its been more than 10 years of Bitcoin’s existence, and the price growth has been unfathomable. Beginning with less than $1 in 2010, it has seen unprecedented growth, and two major cycles of bulls and bears. Gold, on the other hand, has been stabler but is a potent indicator of global economic activity.
The Ratio, Why It Matters?
In blue is the simplistic ratio between Gold/Bitcoin. Due to the short history of Bitcoin and slow change of price in gold, the curves and usually defined by Bitcoin’s price.
Post-June 2019, things, however, started to change. The rise in gold did not increase the ratio between Gold/Bitcoin, rather it further decreased due to a higher proportional rise in Bitcoin. Then during the bear market of 2019, it rose linearly as once again gold was holding onto its levels, while Bitcoin dropped from $14,000 to lows around $6,450.
What changed specifically is the rise in gold. Gold is up over 35% since June 2019. This is significant given the six-year range below $1400 and $1350 (in the latter half). Bitcoin, on the other hand, had a major bull and bear cycle.
Due to the strong fundamental correlation between Bitcoin and Gold, during bull markets of gold and Bitcoin, the value of the ratio decelerates quickly and vice versa. This marks a higher systematic risk in Bitcoin when it comes to ‘safe-haven’ assets.
A Break-out to the Downside
Current levels are significant, w.r.t to the fact that we might be looking at another bull run of the assets. Hence, the ratio must look to decelerate quickly to the downside.
Micheal Novogratz seems to suggest,
Also watch Gold vs Bitcoin. If that chart breaks higher it will turbo boost Bitcoin.
Hence, if we’re looking for spikes in the ratio on the short-term to act as catalysts, that’s all right. But in, the long-run, we’d like this ratio to drop.
Highs and Lows
This is obviously not an indicator so much as an intuitive tool. Now the downside to the chart (or upside to Bitcoin) is capped at 0 (no negatives). Let’s say, Bitcoin reaches $100,000 with gold at $2,000, at that point, the ratio will be 0.02.
However, in the case of bears, the line for invalidation would be somewhere around 0.394. We’ve come a long way in the past decade, and the price is, in fact, squeezing in between the bulls and bears with the bearish inclination (on this chart) being stronger. Which is what we’d like to have, btw.