The ratio in the chart above divides the price of Bitcoin by the price of Gold and represents the number of ounces of gold it takes to buy a single bitcoin. When the ratio rises, bitcoin is outperforming gold - and when it falls, gold is outperforming bitcoin. The chart's yAxis is logarithmic for better visualization and to cope with bitcoin's parabolic advances over time.
Bitcoin was launched in 2009 by Satoshi Nakamoto who's true identity remains unknown. According to Satoshi's whitepaper, bitcoin promises to be the first purely peer-to-peer version of electronic cash without having to rely on any financial intermediary. Like gold, there is a limited amount of bitcoin. Programmed in the source code, there are a limit of 21 million tokens as well as halving events, which reduce the supply of bitcoin by 50% - ensuring that the final bitcoin won't be issued until about the year 2140. Through an innovative incentive structure, so called "miners" compete in solving a math problem and get rewarded in bitcoin - securing the network and verifying transactions in the process.
Bitcoin and gold are frequently compared as investment assets. Gold has a longstanding reputation as a dependable store of value, often utilized as a hedge against inflation and economic uncertainty. Bitcoin, on the other hand, has emerged as a digital store of value in recent years, garnering attention for its limited supply and decentralized nature. While gold offers stability and tangibility, bitcoin provides advantages such as divisibility, portability, and transparency through its digital infrastructure. Both bitcoin and gold are commonly viewed as means to diversify a portfolio and hedge against inflation resulting from fiat currency debasement.
This chart displays the same ratio from the chart above on a linear scale.
The chart above displays the 1-year rolling correlation coefficient between the price of bitcoin and the price of gold. A correlation coefficient of +1 indicates a perfect positive correlation, meaning that the price of bitcoin and the price of gold moved in the same direction during the specified time window. Conversely, a correlation coefficient of -1 indicates that they moved in opposite directions.
Diversification is the practice of spreading investments across different asset classes to reduce risk. In his book Principles, Ray Dalio called diversification the “Holy Grail of Investing”. He realized that with fifteen to twenty uncorrelated return streams, he could dramatically reduce the risks without reducing the expected returns.
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