By CCN.com: Trading bitcoin comes with an extremely high degree of risk because of its volatility.
Other than technical analysis, which can assist in finding buy and sell points, crypto traders are beholden to the whims of other traders.
This is particularly true for bitcoin because its value isn’t tied to any asset, which would give it some framework for intrinsic value.
Traders are making decisions based on what they 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.
Bitcoin traders are thus wise to use any kind of hedge that they can find.
For the past few months, one such hedge has been, ironically, gold – and not the “digital” kind.
Late last year, deep in the throes of “crypto winter,” the bitcoin price cratered 50 percent, barely maintaining the $3,000 level heading into mid-December.
Here’s gold over the same period. The yellow metal 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 20 percent.
The bitcoin whale rally that began when gold topped out in late February ran from $4,000 to about $9,000 earlier this month (It has since exploded above $11,000 to set a new yearly high).
Gold, meanwhile, fell from $1,337 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 like the whales were, 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 percent return.
Gold has not traditionally been inversely correlated to bitcoin. Gold is usually inversely correlated to the dollar.
The reason this pattern is significant is that it 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.
This article was edited by Josiah Wilmoth for CCN.com. If you see a breach of our Code of Ethics or Rights and Duties of the Editor, or find a factual, spelling, or grammar error, please contact us and we will look at it as soon as possible.
Last modified: June 23, 2020 7:37 PM UTC