By CCN Markets: 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.
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.
Gold Seems to Be a Partial Crypto Market Hedge
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.
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 Is Usually Tied to the Dollar, Not Bitcoin
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.