Study finds crypto is ‘fool’s gold’ when it comes to hedging

Cryptoassets’ status as a perceived safe haven from volatile equities markets has been severely damaged this year, with the sector in a free-fall alongside stocks.

Bitcoin, trading around US$20,000 on Tuesday, is down by more than 50% this year. The S&P 500 closed Monday down by almost 17% over the same period.

But how have Bitcoin, gold and equities compared in other recent downturns? A team of researchers from George Mason University in Virginia examined the correlations.

The researchers looked at the five periods since 2018 when the S&P 500 fell by at least 7.5%: January and February 2018, September to December 2018, spring 2019, the Covid crash in early 2020, and January to March of this year.

Aside from the brief bear market in March 2020, the study found that gold had a negative correlation with equities during the downturns: an average negative correlation of -0.134 compared to a slight positive correlation of 0.060 outside of major downturns.

“Gold does offer some protection in down markets and lives up to its status as a perennial hedge,” the study found.

This was not the case with Bitcoin. Outside of major equity downturns, the correlation between the cryptoasset and the S&P 500 was slightly positive at 0.129. That correlation jumped, on average, during the five downturns to 0.258.

The Bitcoin-S&P 500 correlation was strongly negative (-0.583) in the 2019 downturn. However, the correlation was 0.588 during the initial Covid crash and 0.493 in the first two months of this year, the study found.

The researchers also compared Bitcoin and gold. They found their correlation was slightly positive in both rising markets (0.057 on average) and during the five downturns (0.064 on average).

The study concluded that Bitcoin is more “fool’s gold” than “digital gold” during market panics, because its correlation with the S&P 500 increases.

“[W]hatever its proponents may say about its utility as a hedge against market downturns, crypto has served as more of an anti-hedge, with its correlation with the S&P 500 rising as stocks plunge,” it said.

“That said, given the lack of correlation between gold and crypto, the latter may add some diversification benefits to a portfolio.”

Mark Burgess

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Mark was the managing editor of Advisor.ca from 2017 to 2024.