Is There Correlation Between Bitcoin and Oil?

Is There Correlation Between Bitcoin and Oil?

Crude oil is the primary oil product consumed, even though it shares a global trading relationship with refined products, like diesel or jet fuels. One could argue that when Bitcoin crashes (as recently), it affects Oil prices. Read more about the future of oil trading at oilprofits.com.

Others argue with the idea of a correlation altogether and vice versa. Scant research has been done in this area, so drawing definitive conclusions would be difficult. With provocative experts highlighting what may be evidence of causation, we explore the various arguments for and against this theory of correlation.

 We will first look at the United States and International markets and then at Bitcoin. They see this as further evidence that bitcoin is a hedging tool for those directly exposed to the energy markets. The argument for the cause-and-effect relationship is based on the theory that when investors are worried about geopolitical issues, they will invest in safe-haven assets such as gold, silver, or bitcoin.

Therefore, the people who use gold and silver as a hedge against fiat currencies will be justified in their actions. In 2011, the price of oil averaged around $90 a barrel. Bitcoin was trading at around $4 at this time. Gold had a high of $1,900 an ounce, silver was over $50 an ounce, and bitcoin traded for approximately one-tenth of the price at 2013’s prices (approximately $130).

The argument against the correlation is based on two facts:

  1. There are many reasons other than oil that cause Bitcoin to rise in value. There are many reasons other than oil that Bitcoin can fall in value. The first argument is that many things besides oil lead to a rise in bitcoin. We look to the relationship between gold and oil prices to give us perspective on bitcoin. The prices of both had inverse correlations from 2003-2013. From 2000-2003, the two were highly correlated.
  2.  They were not correlated mainly due to 9/11, a catalyst that brought gold into a haven status. According to Ben Graham (a famous value investor), if you are an asset that increases in value when fiat currencies decrease in value, then you will increase in value in a strong economy (due to fiat increase) and decrease in value during recessions (due to fiat decreases). In this instance, most commodities will behave this way; however, gold has been historically used as a hedge against inflation.

Some Potential Arguments:

The other argument against the correlation is that many factors can lead to an increase or decrease in bitcoin. They claim these were caused by various issues, including China’s devaluation of their currency, ISIS, and monetary policy. When bitcoin is used as a hedge against fiat currencies or oil, it should correlate to gold or silver prices.

 According to this logic, any time oil prices increase dramatically, we would see a similar spike in gold and silver prices. However, according to a report from the U.S. Federal Reserve, gold has dropped in value by approximately 7% over the last 4 years. Moreover, it was a relatively weak period for precious metals, so it might not hold in the future. On the other hand, if you are an investor selling short on bitcoin (i.e., betting against it), you would make money if oil prices fall and oil prices go up simultaneously.

One question from this article is why they would use oil as a correlation. Users could argue that they are comparing apples to oranges in terms of the correlation between bitcoin and oil prices. Also, bitcoin stands out as a unique asset with unique trading behavior when looking at the correlation between oil and gold.

How are bitcoin and oil prices linked to each other?

Some potential sources conclude what drives bitcoin and oil prices. First, it is essential to note that the mining process for bitcoin is significantly more energy intensive than using gold as a hedge. Furthermore, the production of oil requires a large number of carbon emissions.

When it comes down to it, oil and bitcoin have very little correlation with one another. Furthermore, the correlation between these two assets over time shows that the correlation is relatively weak (below 0.30).

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