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The start of 2020 saw significant gains in the cryptocurrency market as a whole. Recently, the price of Bitcoin (BTC) hit a record 2 months above the $ 9,000 limit, as did other cryptocurrencies such as Litecoin (LTC) which reached $ 62.80, the highest price seen since mid-November 2018.
Weekly overview of the cryptocurrency market. Source: Coin360
The volatile behavior of cryptocurrencies is a major concern raised by researchers and complicates the argument that Bitcoin should be classified as a traditional investment asset and that it is a reliable store of value.
Amid these discussions, Bitcoin has been closely compared to gold, while Litecoin has been associated with being “Bitcoin’s silver to gold”.
As Cointelegraph reported, new data suggests that the actual correlation between Bitcoin and gold is not significant, as is gold’s explanatory power of Bitcoin’s returns. However, Bitcoin is still often compared to gold, particularly as a potential safe haven.
Since October 2019, silver prices have been approaching new record highs. But does the latest data support the argument that Litecoin is the silver of cryptocurrencies? Could Bitcoin instead of Litecoin be closer to silver than gold?
Silver prices since October 2019. Source: BullionVault
Is Bitcoin or Litecoin Price Action Closer to Silver?
Our data – from May 2013 to December 2019 – shows that the returns of Bitcoin and Litecoin correlate very positively (0.67) with 1 implying a strong positive correlation and 0 meaning that the assets are not correlated. A reading of -1 shows that the assets are completely inversely related.
Meanwhile, the correlation between silver and litecoin returns is close to zero (0.026), which is similar to Bitcoin’s correlation with silver (0.0025).
We further analyzed the correlation between lagged silver returns and the two assets. In other words, the correlation between yesterday’s silver returns and today’s Litecoin and Bitcoin returns was compared.
However, the results are even more disheartening, as both show negative correlations with lagged silver returns. Bitcoin’s correlation was -0.03 while that of Litecoin was -0.05.
April 2013-December 2019 Correlation Between Silver, Bitcoin and Litecoin Returns and Lagged Silver Returns
Continuous correlation analysis provides a broader view and each data point in the diagram above relates to the correlation of silver and Bitcoin (BTC / silver) returns and between silver and Litecoin (LTC / silver) returns over the past 30 days.
It can be seen that the correlation between Bitcoin and silver, and Litecoin and silver, is very similar over time during both negative and positive periods.
Ongoing correlations between Bitcoin / silver and Litecoin / silver from May 2013 to December 2019
Hence, both Bitcoin and Litecoin have a small correlation and a similar relationship with silver. Therefore, the Litecoin narrative as “digital silver” is challenged by these very low correlation values. Furthermore, it is not surprising that Bitcoin has overtaken both Litecoin and silver as the best investment option over the past decade.
Cumulative returns of Bitcoin, Litecoin and silver from investments made between May 2013 and January 2020
The relationship between digital assets and commodities from 2018 to 2019
For investors, a closer look at these short-term relationships can help them gain better insights into future investment strategies. In 2018, the correlation between silver for both assets is slightly higher than the first results from May 2013 to December 2019, although still very low. Bitcoin correlates at 0.05 with silver and Litecoin correlates with 0.09.
While in 2019, Bitcoin and Litecoin had opposite correlations to silver with the Bitcoin and silver correlation equal to 0.03 and the Litecoin and silver correlation negative at -0.02. The correlation between Bitcoin and Litecoin returns is also lower than other samples (0.74).
However, both results are very close to 0, which leads us to believe that the correlation between these assets is not sufficiently representative to design reliable strategies for investors.
Correlation in 2019 between silver returns, BTC returns and Litecoin returns
Is silver a useful predictor of Litecoin and Bitcoin returns?
The data, however, suggests that silver returns could serve as a predictor for future Litecoin returns. From the model used, if the silver yield increased 1% yesterday, we can expect Litecoin yields to decline by -0.232% today. This statistically significant result may lead investors to assume that silver returns may function as a predictor of Litecoin’s future returns in a negative way. However, no similar results were found in the case of Bitcoin.
The ability to predict prices has been the holy grail of financial markets, hence the importance of this relationship between returns. Although both cryptocurrencies show very low correlation with silver, the results for lagged returns shed light on the relationship between silver and Litecoin’s future returns.
Looking ahead, investors may want to look at silver returns to draw strategies when buying / selling Litecoin based on analyzing this past silver return. However, any strategy must consider the rapidly changing environment of the cryptocurrency market and careful analysis over different time periods, which can lead to different conclusions.
However, these results may help us conclude that Litecoin as a digital equivalent of silver is far-fetched due to the low correlations. However, we highlight the value of investigating the digital silver narrative by establishing a new connection between returns, which is critical for investors.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your research when making a decision.
