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It’s been interesting to track the crypto markets in recent months, with the normally-volatile asset class being uncharacteristically calm.

Amid a summer trading lull and the relative absence of large needle-movers recently on the macro stage, volatility has been dipping. In fact, looking at implied volatility in the Bitcoin options market, current levels are treading around all-time lows. 

While falling volatility may sound positive on the surface, this does not necessarily mean that Bitcoin is any closer to achieving the coveted status of a reliable store of value. While one can speculate over whether that eventuality may one day come to fruition, a useful way of demonstrating that it remains a long way off, at least for now, is comparing the price action to gold. 

Despite the fall in volatility, Bitcoin’s correlation with gold is actually falling, now at its lowest level since the start of 2023. 

This seems to suggest that the dip in volatility is merely a result of a summer trading lull, backed up by the fact that trading volume on exchanges is currently at the lowest level since 2020. 

The correlation between the two assets fast moving towards a strongly inverse mark is the opposite of what many Bitcoiners hope will one day happen. Having said that, it is important to note the context here and be prudent when assessing the numbers. 

An example of how one needs to be vigilant when drawing conclusions is shown on the next chart. Instead of presenting the 60-day correlation between gold and Bitcoin, it displays the 30-day correlation. This shows the exact opposite, namely that the correlation between the two assets is rising. 

In truth, none of these charts are overly insightful. What seems to be clear overall is that Bitcoin does not yet trade similarly to gold. While there may be a loose relationship in certain time periods, Bitcoin is on a different planet to gold when comparing volatility, risk/return and perception. That may one day change, but the recent dip in volatility for Bitcoin is not because it is finally becoming a digital form of gold. 

A neat way to assess the difference between Bitcoin and gold is to zoom in on their price action since the start of 2022. This coincides with the outbreak of inflation, and the transition of the economy into a tight monetary environment following years of basement-level interest rates (the first hike by the Federal Reserve occurred in March 2022). 

The next chart shows the returns of Bitcoin during this period compared to gold. The former plummeted, still down 33% today compared to its level at the start of 2022, despite doubling thus far in 2023. In contrast, gold is up over 6% in the same timeframe. Bitcoin remains over 55% off its all-time high from November 2021, while gold is within 5% of its own record mark. 

The reason Bitcoin is so often compared to gold is that the shiny metal represents one of the most firmly established store of values currently on the market. Humans have clamoured over gold for thousands of years, while many currencies over the years have been backed by the commodity. 

It is seen as a way to protect one’s purchasing power by hedging against inflation- a particularly poignant attribute amid the climate of the last eighteen months. 

Gold is the classic “uncorrelated” asset, a portfolio diversifier that offers a lower return profile, but also lower risk. The next chart displays this well, plotting the asset’s returns over the last half century, with periods of recession marked in grey. While it is not perfect, it has generally offered holders downside protection during these periods of uncertainty (note we are using the technical definition of a recession here, i.e. two periods of consecutive negative GDP growth, meaning the two brief recessions of Q2 2020 and Q2 2022 are included).  

Bitcoin, with its capped supply meaning it cannot be printed, is seen as offering similar fundamental properties to gold. This has led to enthusiasts declaring that it will eventually decouple from risk assets and offer the same inflation-hedging and store-of-value properties.

To date, this has not happened. Bitcoin was only launched in 2009, and only traded with reasonable liquidity for the last few years, so it is not surprising that it still trades like a risk-asset. The real question is what happens in the future, and whether Bitcoin can gravitate more towards trading like gold. 

The below chart demonstrates well how Bitcoin currently trades like a risk asset. Plotting its price against two-year yields, which track interest rate expectations, shows a hand-holding relationship (yields are plotted on an inverted scale). In other words, as yields rise, Bitcoin falls – in line with typical risk asset behaviour. 

Whichever way you swing the numbers, the reality is that Bitcoin currently trades like a risk asset. This has been made abundantly clear, if there was any ever doubt, by its plummet last year and subsequent rise this year in line with yields, as the Federal Reserve hiked rates incessantly before the market softened its expectations as inflation began to cool off. 

The real question is whether it can one day change and trade more like that famous, enigmatic, shiny thing that we call gold.

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