Bitcoin Versus Gold Prices: Correlation or Mis-specification

Abstract

Bitcoin is a newly created currency, which is also considered as “Digital Gold.” Whereas, Gold is a precious yellow metal. Bitcoins are more independent of the government than gold. Both gold and bitcoins are scanty resources, and thus, prices of both these assets appreciate or deteriorate depending on the demand and supply. An attempt was made to examine the association between prices of these two currencies. For this purpose, three different models were run: independent sample t-test, correlation analysis, and regression analysis. The outcomes of the independent sample  t-test revealed that there exists a significant difference between the gold and bitcoin prices. However, the findings of correlation analysis show that movements in gold prices are statistically and positively linked to bitcoin prices. These findings indicate that gold prices move in the same direction as bitcoin prices. Further, the results of regression analysis also depicted that movement of bitcoin prices depends on movement of gold prices. Since its genesis, bitcoin prices have experienced around 37,418 appreciations, which make it an extraordinary currency. However, this study argued that bitcoin is establishing itself as an investment asset for the short term only because fluctuation in prices is very abnormal and unreliable in the long run. Moreover, robustness checks further show that gold prices are increasing at a steady rate, but increments are regular and trustworthy. Finally, the study found that bitcoin provides much higher returns to investors than gold. These results are crucial for the risk-taker investors who are looking for higher returns because bitcoins are getting growing public exposure day by day and attracting investments throughout the world.