Bitcoin (BTC) is proposed to provided a modern era store-of-value and be a potential successor to Gold (GLD)(Ammous, 2018).
Ammous (2018) illustrates that one of the key determinate factors of both BTC and GLD in conferring this property is that they both demonstrate a high stock-to-flow ratio.
Stock-to-flow refers to the property by which the current global stock or holding of an asset compares to the potential incoming flow of that asset. For example, the global stock of GLD compared to the potential new production of GLD is very high — i.e. its a rare metal on Earth and the effort of extraction of new GLD only accounts for some 2% of the stock. This is compared to the potential stock-to-flow of fiat currency whereby government issued paper (no longer backed by anything like a gold standard) can be printed / minted readily (with little effort) thus large quantities of new flow can devalue currently held stock, leading to inflationary periods and the consequential socio-economic results.
The economic model of BTC is purported to resemble that of GLD as BTC miners are effectively expending a larger amount of resource and effort in minting new Bitcoins. In addition the total global supply of BTC is capped to 22 million; this should result in a deflationary currency.
This study will make heavy use of the methods of Hilpisch (2020), who writes as a specialist in the domain of data-driven finance. So as such this post is both a learning exercise of personal interest in the crypto currency markets and a vehicle by which the author can learn and test the methods of Hilpisch.
Problem Statements
- Investigate the potential correlation between BTC and GLD returns in time-series, assuming a positive correlation indicates some representation whereby BTC is also considered a store-of-value. The assumption here is that when investors opt for gold as a store-of-value they could also opt for BTC.
- Machine learning will be applied to determine if the trades into BTC or GLD can be recommended over just holding a long position (it is suspected that the recent activities driving the price of BTC higher could result in an extremely simple, hold only strategy)
Metrics
The metrics for this project are relatively simple, given the strong connection to the financial domain and are either the price of the assets (GLD, BTC), the returns or relevant statistical metrics such as correlation.
Data
Data for crypto currency prices where obtained for free from CryptoDataDownload.com and data is from the crypto currency exchange Binance.
Data for gold prices was obtained from Yahoo! Finance.
Environment
The analysis was carried out using Jupyter and Python 3.x. The analysis notebook and list of required libraries in use are noted in the accompanying GitHub repository at https://github.com/rsiwicki/rock_dex/.