The last few weeks brought something interesting in financial markets – Bitcoin decoupled from two correlations that were valid for the entire year so far.
One was the negative correlation with the USD. Every time the USD rallied, it did so against Bitcoin. Or, when the USD was sold during a risk-on move, Bitcoin rallied.
The other one was against gold. This year Bitcoin and gold had a positive correlation. Since the March meltdown in the stock market that triggered an initial move lower on gold too, stocks corrected, and so did gold. Bitcoin followed gold closely and rose above $10k on gold surging above $2k.
Recently, however, Bitcoin seems to have a life of its own. The USD strengthened against the main fiat currencies – EUR, AUD, GBP, but failed to do the same against Bitcoin. Also, gold fell against the USD, but Bitcoin did not follow suit.
What caused Bitcoin correlations to break? More importantly, for how long will the decoupling last?
Important Developments in the Cryptocurrency Market
2020 will make history as the year when the pandemic hit. However, it is also the year when the cryptocurrency adoption increased the most. As such, one explanation for the sharp advance in Bitcoin to above $13k is the increased adoption.
It all started with MicroStrategy, a U.S. public company, revealing a Bitcoin investment worth over $100 million. Shortly after, another public company, Square, announced that it invested 1% of its total assets in Bitcoin. The last, and perhaps the most relevant news came from PayPal – the online payment giant announced that it would allow cryptocurrency payments at its over twenty million merchants around the world.
At that point, Bitcoin traded around $10k, and the news sent it much higher. The question that remains now – can Bitcoin compete with gold as an alternative investment? Or, even more importantly, can it replace gold?
Both assets have one characteristic in common – scarcity. Most gold in the world has already been mined, and there is also only a limited number of Bitcoins that will ever be mined.
Various models predict that Bitcoin will reach $100k as early as next year. This cannot happen unless Bitcoin decouples from its USD correlation, and the gold correlation continues. Otherwise, for Bitcoin to increase tenfold, the USD must decline aggressively, with irremediable damages to the financial system.