This note will focus on three assets that due to their characteristics many deal like commodity, and since they are also all equity assets, we decided to give a space to the study of volatility and the correlation between these 3.
We refer to Bitcoin, Gold and Oil.
Commodity means all types of goods that are generic, that is, they do not have a differentiation from each other. Normally when talking about commodities, we talk about raw materials or primary goods that in any part of the world and tend to the same price and the same quality, among them bitcoin would be the exception to the general denomination, but this article will not deal with this concept.
Regarding oil, we decided to use the price of WTI (West Texas Intermediate) since the US is the largest products worldwide, although it is not among the largest exporters, it seems more relevant to us than Brent in the United Kingdom and that quoted by OPEC (Organization of the Petroleum Exporting Countries), however the variation between these is not usually high and they are practically the same values.
Before going into detail we will consider in a very general way the factors that usually affect these 3 assets:
Wars: In times of tensions between countries we have seen a behavior not quite defined, but if in the vast majority of cases the price rose, while at calm times it does not necessarily imply a decline.
Oil Inventory: This implies that at higher reserves we can expect a lower demand and a lower price for Oil, while at lower reserves the demand will exceed the supply by raising the price.
Monetary emission and credit bubble: History confirms that one of the biggest economic problems worldwide is the rampant monetary emission and the credit bubble, and this specific data directly impacts on equity assets such as gold.
Financial Institutions trading futures and etf´s: Gold besides being physical is traded by large financial institutions in the form of futures and etf´s that are financial instruments that directly impact the price of their underlying assets.
Gold Purchase: Both banks, private companies and individuals are betting on the purchase of gold as a safeguard of value and the time horizon of their investments is usually very long term without closing their positions, which generates a lot of purchase and little sale.
Mass adoption: The fact that large companies adopt these new technologies as a means of transfer, or that large institutions accept futures or etf's make the market healthier, hand in hand with natural persons entering and educating in this new world of digital assets
Government regulations: The regulations that governments implement such as China, USA, Russia among some large, directly affect the price, although due to the nature of bitcoin it is difficult to regulate it directly, yes they can regulate part of the ecosystem surrounding bitcoin.
And as common components we name general macro news that can affect the 3 markets as well as the law of supply and demand.
So at first glance and taking a very generic aspect we can see that the factors are not entirely related, but usually in both 3 when there are financial crises at a global level, investors tend to leave the less attractive rates and move to the variable such as these cases.
Volatility - An obvious conclusion
To say that these new digital assets have a lot of volatility is public knowledge, now the more volatile they are compared to gold and oil, and for this we will see the values in the last 3 periods.
Here we can deduce that bitcoin has lowered its volatility due to mass adoption both in final consumers and in institutions that make the liquidity of the market greater by bringing important players through financial institutions. In these last 3 years the low value in almost 30%
Regarding gold and oil we can see that the first one under its volatility by almost 65% while oil rose by almost 37%
Therefore, we can conclude that the digital asset with respect to physicists has a ratio of just over 4:1, which is the same as saying that it is 4 times more volatile, but with the projection of having said ratio decreased as the Crypto market is healthier in terms of market liquidity.
Correlations - Not as much as one might think
In this chart we have added the price of the 3 assets and have marked the following important points in addition to the correlations that we conclude below:
3YH / ATH (3 year high that coincides with all time high)> US $ 19,500 in Dec-17
3YL (3 year Low)> US $ 760 on Jan-17
3YH (3 year High)> US $ 1,560 in Jan-20
3YL (3 year Low)> US $ 1,180 in Aug-18
3YH (3 year high)> US $ 76 on Oct-18
3YL (3 year low)> US $ 42 in Dec-18
As can be concluded at a glance, the assets did not share their maximum or minimum moments in the last 3 years, which implies thinking that there is not so much correlation, but we will see the values specifically below.
Regarding the correlation, we remember that this is a statistical measure that shows the degree of relationship between two assets and whose value is in the range between 1 and -1. If its value is 1 it means that the prices of both move in the same direction, while a correlation of -1 means that the prices move in opposite directions. While if its value is zero it means that prices are not linearly related, that is, the movement of the price of one asset has no effect on the movement of the price of the other.
Here we leave an important fact to diminish this statistical data that plays in favor of gold and oil, and against bitcoin. All cryptocurrencies trade 365 days a year, while the traditional stock market quotes only the business days that can amount to 250/2 according to certain calendars. This implies that to compare these assets, the matrices had to be matched by putting gold and oil with the price of weekends and holidays, this implies that these days the price of these assets was the same until new market opening the next business day which implies that these days the variation they have is 0% lowering the volatility quite a bit compared to bitcoin that has no rest.
We can quickly see that the values are closer to zero than to the extremes, this implies that the assets do not have a well-defined behavior. If we take btc against gold in particular if we see that the values were always positive, which indicates that both move in the same direction, a situation that is often speculated given the degree of similarity that these assets have, not so with the btc against oil that is always negative. Regarding gold with oil, it can also be seen that when the bright asset was in 3YL the dark asset was 2 months after its 3YH, which also implies a quick conclusion that they do not move to the same side, but do share moments bullish impulses due to external factors that can benefit both sectors, such as the futures and/or etf´s of both assets marketed by large american financial institutions, which in recent times have been commercialized a lot.
Given the current values we can find good opportunities in the 3 markets, given that bitcoin in the technical analysis is showing indicators that can change to upward trend.
We see gold in highs of more than 6 years ago, to which to be careful with the pullback that even these days is showing, but if it tends to break some psychological resistance and accompanied by a healthy volume by the institutions we can see gold in a new bullish momentum that will take it above US $ 1,600.
While oil is conditioned not only by production but also by the wars that are going on between the US and Iran that although the reason for them is not oil (assuming that what Trump has said is true) should not be seen so affected as to generate price instability, but considering that all of 2019 was a recovery zone starting at 3YL at US $ 42, we could also provide an upward framework for this asset as well.
Although this analysis does not try to give buying and/or selling advice, if it tries to put into context the relationship that these 3 assets have and to consider the entry or exit when creating a portfolio.