Bitcoin's Relationship with Gold
Hello everyone!
This post will explore Bitcoin’s relationship with gold and how we can extract trading signals from it.
The idea behind this is based on a research paper published about lumber’s relationship with gold: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2604248. The paper seeks to build a model that will accurately foretell future economic conditions and inflationary expectations using two functionally opposite commodities: lumber and gold.
Housing is the lifeblood of the economy. Housing prices are sensitive to lumber prices. Lumber, therefore, provides an accurate barometer for risk around the economy. As lumber rises, investors are confident in the current economic landscape, as they believe in growth.
On the other hand, gold is considered a safe haven, so investors flock to this commodity once they become wary of current economic conditions or expect inflation to rise.
Increasing lumber prices relative to gold signal investor confidence and economic growth. Increasing gold prices relative to lumber indicate investor fear or caution.
Bitcoin and Gold:
A similar relationship can be drawn between Bitcoin and gold. Over the past decade of Bitcoin’s development, Bitcoin’s scarcity and difficulty to create mimic gold, which has led to it being called “digital gold.”
Bitcoin and gold can therefore both be grouped in the same category as safe havens that protect against inflation. However, of the two, Bitcoin is obviously the riskier asset because it is much more volatile and sensitive to external news.
Drawing a parallel to the lumber/gold relationship, a rise in Bitcoin relative to gold indicates rising investor risk appetite, while the opposite occurs with gold’s rise relative to Bitcoin. The next chapter will attempt to create a trading signal from this rate of change.
The signal:
Bitcoin is the best performing asset of all time, so simply plotting it against gold will yield a graph with continuous upwards momentum. However, instead of plotting it directly, the rate of change of this graph can instead be measured. With this relationship, Bitcoin’s rising rate of change relative to gold indicates belief in its upward momentum. In contrast, a negative rate of change would suggest that investors believe that Bitcoin’s run is possibly over and are rotating to safer assets such as gold.
To draw a relationship with this, I built this Bitcoin vs Gold chart with a Weekly 9-period Rate of Change Indicator.
The signal for this indicator is the following:
1. Buy once the ROC crosses above 100
2. Sell once the ROC crosses below the zero line
The chart demonstrates that utilizing this method predicted the long-term and intermediate tops pretty accurately, including this one.
The following list details the returns obtained when using this strategy since 2013:
February 11, 2013 – June 3, 2013: 401%
November 4, 2013 – January 20, 2014: 294%
May 22, 2017 – January 22, 2018: 481%
May 13, 2019 – July 22, 2019: 29%
December 21, 2020 – April 19, 2021: 145%
Total return: 362 times the initial investment! (Assuming total reinvestment)
As can be seen, this strategy has consistently demonstrated gargantuan gains while never having a negative signal since its inception.
2021 Bitcoin Bear Market:
We crossed to the downside on April 19, 2021 when Bitcoin was at 56k. This cross anticipated the last high before the precipitous decline over recent weeks. Historically, this cross has been followed by periods of large downside spanning large periods of time.
So does this mean we are entering a bear market?
Not necessarily. Past performance is not indicative of future results. But I would say the charts remain bearish until we get a cross from the ROC to the upside.
If you have any questions or any other topic you would like to be covered, please let me know in the comments below.
Note: All credit for this idea goes to Michael from Figuring Out Money. You can check out his video on the topic at the following link:
https://www.youtube.com/watch?v=zuG9Tjnud9k
This post will explore Bitcoin’s relationship with gold and how we can extract trading signals from it.
The idea behind this is based on a research paper published about lumber’s relationship with gold: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2604248. The paper seeks to build a model that will accurately foretell future economic conditions and inflationary expectations using two functionally opposite commodities: lumber and gold.
Housing is the lifeblood of the economy. Housing prices are sensitive to lumber prices. Lumber, therefore, provides an accurate barometer for risk around the economy. As lumber rises, investors are confident in the current economic landscape, as they believe in growth.
On the other hand, gold is considered a safe haven, so investors flock to this commodity once they become wary of current economic conditions or expect inflation to rise.
Increasing lumber prices relative to gold signal investor confidence and economic growth. Increasing gold prices relative to lumber indicate investor fear or caution.
Bitcoin and Gold:
A similar relationship can be drawn between Bitcoin and gold. Over the past decade of Bitcoin’s development, Bitcoin’s scarcity and difficulty to create mimic gold, which has led to it being called “digital gold.”
Bitcoin and gold can therefore both be grouped in the same category as safe havens that protect against inflation. However, of the two, Bitcoin is obviously the riskier asset because it is much more volatile and sensitive to external news.
Drawing a parallel to the lumber/gold relationship, a rise in Bitcoin relative to gold indicates rising investor risk appetite, while the opposite occurs with gold’s rise relative to Bitcoin. The next chapter will attempt to create a trading signal from this rate of change.
The signal:
Bitcoin is the best performing asset of all time, so simply plotting it against gold will yield a graph with continuous upwards momentum. However, instead of plotting it directly, the rate of change of this graph can instead be measured. With this relationship, Bitcoin’s rising rate of change relative to gold indicates belief in its upward momentum. In contrast, a negative rate of change would suggest that investors believe that Bitcoin’s run is possibly over and are rotating to safer assets such as gold.
To draw a relationship with this, I built this Bitcoin vs Gold chart with a Weekly 9-period Rate of Change Indicator.
The signal for this indicator is the following:
1. Buy once the ROC crosses above 100
2. Sell once the ROC crosses below the zero line
The chart demonstrates that utilizing this method predicted the long-term and intermediate tops pretty accurately, including this one.
The following list details the returns obtained when using this strategy since 2013:
February 11, 2013 – June 3, 2013: 401%
November 4, 2013 – January 20, 2014: 294%
May 22, 2017 – January 22, 2018: 481%
May 13, 2019 – July 22, 2019: 29%
December 21, 2020 – April 19, 2021: 145%
Total return: 362 times the initial investment! (Assuming total reinvestment)
As can be seen, this strategy has consistently demonstrated gargantuan gains while never having a negative signal since its inception.
2021 Bitcoin Bear Market:
We crossed to the downside on April 19, 2021 when Bitcoin was at 56k. This cross anticipated the last high before the precipitous decline over recent weeks. Historically, this cross has been followed by periods of large downside spanning large periods of time.
So does this mean we are entering a bear market?
Not necessarily. Past performance is not indicative of future results. But I would say the charts remain bearish until we get a cross from the ROC to the upside.
If you have any questions or any other topic you would like to be covered, please let me know in the comments below.
Note: All credit for this idea goes to Michael from Figuring Out Money. You can check out his video on the topic at the following link:
https://www.youtube.com/watch?v=zuG9Tjnud9k
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