Can Bitcoin Replace Gold?
Bitcoin, an open source code based on the blockchain, has gained unprecedented attention since the day it was released in 2008, especially since its first trade and tens of millions of times in a decade. Some have come to believe that bitcoin could replace gold because it has some capabilities that gold does not have, such as low fees, fast transfer capabilities and a decentralized nature, in addition to its reserve capacity. Every spike and drop has become a focus of attention and a huge source of controversy
Does Bitcoin have any correlation with Gold?
Regarding the views held on the internet, different people hold different opinions on this proposition. Some people believe that bitcoin and Gold are not correlated. Instead, some people think bitcoin is “digital gold.”
There is some similarity between bitcoin and gold. The government cannot manipulate bitcoin and Gold, and they do not require credit backing from the government. In addition, there are caps on both bitcoin and Gold. The total number of bitcoins is 21 million. And less than 25% have yet to be issued, there is limited Gold, and it is mined out every day. Additionally, the minting tax is also meager, which can also be interpreted as a very low inflation rate.
In order to investigate the correlation and the change of the price. We draw the historical prices of Gold from 2017 July 18th to 2022 July 11th. From the plot we can observe that the gold prices fluctuate between 1200 to 1400 dollars between 2017 to 2019 and it increases dramatically from 2019 to 2020 from around 1400 to 1600 dollars. And between 2020 until now, it fluctuates between 1600 to 2000 dollars.
Figure 1 Gold price
Figure 2 Bitcoin price
In addition, we draw the historical prices of bitcoin as well from 2017 July 18th to 2022, July 11th. Compared with the price of Gold, we can observe prices of bitcoin changed dramatically. The plot shows that the gold prices fluctuate between 10000 to 20000 dollars between 2017 to 2021. And it skyrocketed from 2021 to 2022 from 20000 to 70000 dollars. And from the start of 2022, the price of bitcoin decreased dramatically. However, Gold, as a globally circulating currency, has excellent liquidity. As a result, the gold market may not experience the dramatic fluctuations that bitcoin does due to its inherent very good appreciation as well as constant price characteristics.
From these graphs, we can also observe the similar trend that Gold and Bitcoin fluctuate at lower prices between 2017 and 2020. And from 2020 to 2021, the prices increased sharply. We want to investigate whether there is any correlation between the Gold and bitcoin.
And how the correlation changes through time. And we used the Pearson correlation in python to investigate the correlation between Gold and Bitcoin. The Pearson correlation measures the strength of the correlation between two variables. And lastly, we first measure the correlation between Gold and bitcoin from 2017 to 2020; the Pearson’s correlation coefficient is 0.4039. Moreover, it shows that the price of Gold and bitcoin has some positive correlation! And from 2020 until now, Pearson’s correlation coefficient becomes 0.8405. We can see that the correlation between bitcoin and gold has increased from 2017 until now.
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Written by Yue Zhang
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