Bitcoin Matching Gold’s Footsteps

Last September, I wrote here about how there has been a change in what Bitcoin is and how it behaves.  Bitcoin prices are now walking in the footsteps of gold, and have been since about April 2022.  I should emphasize here that the magnitudes of the price movements in each market do not match.  It is all about the direction of movement and the timing of the turns.  But I figure that in any market, if I get the direction and timing right, then the magnitudes can take care of themselves.

The chart above shows Bitcoin and gold prices aligned on a contemporaneous basis, but this is not quite right.  When we zoom in closer, it turns out that gold prices have been leading Bitcoin prices by about a week.  In other words, whatever dance steps gold is doing now, that's what Bitcoin's movements are going to look like a week later. 

The recent sideways movement during March 2024 in Bitcoin prices matches a sideways period in gold prices a week earlier.  Gold prices broke out of that "flag" structure and started another move up, a movement which Bitcoin is only now starting to replicate.  The implication of this is that Bitcoin prices are going to see a push higher over the next week.

It looks like that move should be to a new high, based on gold's structure.  But remember that while the dance steps largely match (with this 1 week lag), the magnitudes do not necessarily get echoed perfectly.  And having said that, there are moments when the patterns of dance steps do not quite replicate perfectly either, and longtime traders will immediately know that prices are more likely to deviate from the plan at the moment one is counting on them most to follow the plan.

I have no idea why this relationship works.  Nor do I know why it did not work at all before April 2022, and then suddenly started working.  That moment was not terribly special for Bitcoin, i.e. it was not a "halving".  I cannot come up with any good explanation for why that moment should mark the start of their new correlated relationship.  But it did.

Having gold and Bitcoin prices dancing together is not necessarily a good thing.  In his book, "Manias, Panics, and Crashes: A History of Financial Crises" (4th edition), Charles P. Kindleberger wrote that, "...a financial crisis may be more serious if two or more, rather than just one, good or asset is the subject of speculation.  History seems to show that a boom in one market spills over into others." 

The point is that if a trader or investor thinks that he is diversifying by splitting his money between investments in the old gold (i.e. gold) plus the new gold, Bitcoin, he may find out soon that he is not as diversified as he thought since the two are now closely correlated.  And if a decline comes, selling in one market may lead to selling in the other, not just because of the correlation, but because of traders needing to make margin calls based on their losses in another market.  The old saying about trying to trade through a crash is, "If you can't sell what you want to, sell what you can."

Please note that this is not a recommendation in any sense about buying or selling either gold or Bitcoin.  Just food for thought about what is a relatively new financial market relationship.