Is bitcoin’s “digital gold” narrative losing its shine?

AT A GLANCE:

• Crypto assets show near-zero correlation with gold and the U.S. dollar but remain tightly linked to bitcoin’s performance.
• Bitcoin’s limited processing speeds could see a shift to tokens with broader, real-life use cases and faster blockchains that can handle greater volumes.

The cryptocurrency market is facing a paradox: falling despite seemingly favorable macroeconomic conditions and improving regulatory sentiment. The divergence lies not in external factors like gold prices, dollar strength or stock market performance, but more likely in bitcoin's own technical limitations.

The crypto market experienced a significant broad-based selloff to start the year, with bitcoin prices dropping as much as 30%, and coins like Cardano and Stellar Lumens down as much as 70%. This decline is particularly interesting given what should have been, at least in principle, an ideal environment for cryptocurrencies.

Over the same period, precious metals prices have generally increased despite a correction in late January and early February. The U.S. dollar has also fallen in value, and equity markets have continued to rise. Yet cryptocurrencies have struggled—raising questions about what truly drives crypto valuations.

When examining the relationship between cryptocurrency and precious metals like gold, the connection isn’t as strong as many might imagine. Beyond a brief positive correlation in 2020 and 2021, crypto assets generally remain uncorrelated with gold. This divergence is particularly striking because both assets share an appeal rooted in scarcity: the fact that central banks can neither print gold nor bitcoin is a primary driver for investors. However, despite this shared fundamental appeal, their market performance remains decoupled. 

Since they’re referred to as cryptocurrencies, it is sometimes assumed that they must be negatively correlated with the U.S. dollar. This was true in 2022 and 2023, but in recent years the dollar-cryptocurrency correlation has been near zero.

The most intriguing relationship is with equities—since 2020, cryptocurrencies have had a positive correlation with the U.S. stock market. What’s curious: In the past year, the U.S. stock market has been going up while cryptocurrency prices generally have been falling, yet they maintain their positive day-to-day correlation.

If you look at other tokens such as ether, Solana, XRP and Chainlink they tend to have one dominant correlation: bitcoin itself—and the market-leading currency appears to be encountering some problems.

For example, its user network has plateaued. When looking at the number of daily transactions, bitcoin seemed to hit its peak around December 2017 and hasn’t changed much since. The reason appears to be that the blockchain itself is extraordinarily slow, handling only three to seven transactions per second. In contrast, high-performance networks like Solana can process thousands of transactions per second.

While bitcoin’s value remains anchored in its scarcity, like gold, the key question for investors is whether other tokens, with value-driven, tangible cases and faster blockchains, will move from bitcoin’s gravitational pull and help usher the crypto space into its next chapter. 

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