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The Bitcoin gold correlation puzzle

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  • Baur, Dirk G.
  • Hoang, Lai

Abstract

Bitcoin is regularly referred to as new gold, digital gold or gold 2.0. If Bitcoin is indeed gold-like the correlation of Bitcoin and gold returns should be positive. We estimate the correlation of the two assets across time, across different return frequencies and across quantiles and find a near-zero correlation inconsistent with the claimed similarity. We offer two explanations for this puzzle: either the similarity is only a narrative and not accepted by investors or there are other forces at play that depress the true correlation. Such forces could be a substitution effect, investors sell gold and buy Bitcoin, and a catching up effect, investors buy Bitcoin to catch up with the market weight of gold.

Suggested Citation

  • Baur, Dirk G. & Hoang, Lai, 2021. "The Bitcoin gold correlation puzzle," Journal of Behavioral and Experimental Finance, Elsevier, vol. 32(C).
    • Handle: RePEc:eee:beexfi:v:32:y:2021:i:c:s2214635021001052
    DOI: 10.1016/j.jbef.2021.100561
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    References listed on IDEAS

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    1. Klein, Tony & Pham Thu, Hien & Walther, Thomas, 2018. "Bitcoin is not the New Gold – A comparison of volatility, correlation, and portfolio performance," International Review of Financial Analysis, Elsevier, vol. 59(C), pages 105-116.
    2. Conlon, Thomas & McGee, Richard, 2020. "Safe haven or risky hazard? Bitcoin during the Covid-19 bear market," Finance Research Letters, Elsevier, vol. 35(C).
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    5. Smales, L.A., 2019. "Bitcoin as a safe haven: Is it even worth considering?," Finance Research Letters, Elsevier, vol. 30(C), pages 385-393.
    6. Baur, Dirk G. & Hong, KiHoon & Lee, Adrian D., 2018. "Bitcoin: Medium of exchange or speculative assets?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 54(C), pages 177-189.
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    Citations

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    Cited by:

    1. Będowska-Sójka, Barbara & Kliber, Agata, 2022. "Can cryptocurrencies hedge oil price fluctuations? A pandemic perspective," Energy Economics, Elsevier, vol. 115(C).
    2. Kumar, Satish & Rao, Sandeep & Goyal, Kirti & Goyal, Nisha, 2022. "Journal of Behavioral and Experimental Finance: A bibliometric overview," Journal of Behavioral and Experimental Finance, Elsevier, vol. 34(C).
    3. Bilel Sanhaji & Julien Chevallier, 2023. "Tracking ‘Pure’ Systematic Risk with Realized Betas for Bitcoin and Ethereum," Econometrics, MDPI, vol. 11(3), pages 1-36, August.
    4. Sasan Barak & Navid Parvini, 2023. "Transfer‐entropy‐based dynamic feature selection for evaluating Bitcoin price drivers," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(12), pages 1695-1726, December.
    5. Hoque, Mohammad Enamul & Soo-Wah, Low & Tiwari, Aviral Kumar & Akhter, Tahmina, 2023. "Time and frequency domain connectedness and spillover among categorical and regional financial stress, gold and bitcoin market," Resources Policy, Elsevier, vol. 85(PA).
    6. Feng, Hao & Gao, Da & Duan, Kun & Urquhart, Andrew, 2023. "Does Bitcoin affect decomposed oil shocks differently? Evidence from a quantile-based framework," International Review of Financial Analysis, Elsevier, vol. 89(C).
    7. Shang, Yue & Wei, Yu & Chen, Yongfei, 2022. "Cryptocurrency policy uncertainty and gold return forecasting: A dynamic Occam's window approach," Finance Research Letters, Elsevier, vol. 50(C).
    8. Di Casola, Paola & Habib, Maurizio Michael & Tercero-Lucas, David, 2023. "Global and local drivers of Bitcoin trading vis-à-vis fiat currencies," Working Paper Series 2868, European Central Bank.
    9. Yianni Doumenis & Javad Izadi & Pradeep Dhamdhere & Epameinondas Katsikas & Dimitrios Koufopoulos, 2021. "A Critical Analysis of Volatility Surprise in Bitcoin Cryptocurrency and Other Financial Assets," Risks, MDPI, vol. 9(11), pages 1-15, November.

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    More about this item

    Keywords

    Bitcoin; Gold; Correlation; Similarity; Narrative; Substitution; Catching up;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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