Can Gold Help Shield You From Crypto Losses?

Crypto investments can come crashing down just as quickly as they can go to the moon. The key is timing, but given the volatile and unpredictable nature of the crypto market, it's incredibly difficult to time.

That can be difficult, though, as most cryptocurrencies are highly correlated with each other. As it turns out, there's one asset that doesn't seem to be highly correlated with the cryptocurrency market: gold.

When balancing a crypto-heavy portfolio, some might find it helpful to look at assets that have a low correlation to the cryptocurrency market. Because they don't tend to move in the same direction as major cryptocurrencies, these assets will be less likely to lose value in the event of a crash in crypto.

Our asset correlation study found that gold has held a fairly low monthly correlation to the major crypto coins included in our research for the last three years. The resulting correlation coefficients range from 0 to 1.0—the closer to 0, the weaker the correlation, and the closer to 1.0, the stronger the correlation. 

Bitcoin holds the highest correlation to gold (as measured by the iShares Gold Trust) at a moderate positive correlation of 0.5562, and Ethereum, Cardano, Dogecoin, Solana, and Ripple all hold a low positive correlation to gold. Solana and Ripple hold the lowest positive correlation to gold, with a correlation coefficient of 0.33, making these coins nearly uncorrelated with gold. While all of these coins are currently in the top 12 cryptos by market capitalization according to CoinMarketCap, some are certainly more accessible and easily traded than others. Ripple, for example, isn't as widely available on centralized crypto exchanges. This might make the coin notably less liquid, which could factor into why it holds such a low correlation to gold.

Even though gold and Bitcoin hold a moderate positive correlation, it can be helpful to zoom into the performance of the two assets in recent years. The biggest crashes in Bitcoin's price over the past few years occurred in May 2021, when the price fell 30% in one week, and at the tail end of 2021, when the price fell more than 45% over the course of a few months.

When looking at the iShares Gold Trust (IAU) over the same periods, the price of gold maintained its value. In fact, it experienced a slight increase during the May 2021 crypto crash and stayed level during the crypto price drop at the end of 2021.

Some investment experts have posited that crypto could be the new "gold standard," so to speak, in terms of an asset that can serve as an inflation hedge. In theory, these inflation hedge assets should hold a low or negative correlation to the inflation rate.