Crypto enthusiasts often claim that digital coins and tokens are uncorrelated with stocks and can provide a safe haven amid stock market falls. The hypothesis is that cryptoassets will act as “digital gold”, serving as a hedge against equity risk and helping investors ride out these downturns.
These bold claims beg for examination, especially amid what appears to be a bear market for stocks. So we explored how crypto has performed during previous crashes. In particular, we isolated the major panic events throughout crypto’s short history and studied the correlation between this new asset class and some of its more traditional peers.
Five times in the past five years, the S&P 500 fell 7.5% or more. In each of these cases, we measured how the correlations between gold and the S&P 500, bitcoin and the S&P 500, and bitcoin and gold changed. We also looked at correlations between other cryptocurrencies and gold and the S&P 500, but found the results to be qualitatively similar, so we used bitcoin as a proxy for crypto in general.
The correlation between gold and the S&P 500 came in as expected. Outside of major declines, gold and the S&P 500 have only a slight positive correlation of 0.060. However, when the S&P 500 falls, so does its average correlation with gold, which falls to -0.134. The bottom line is clear: gold offers some protection in bear markets and lives up to its perennial hedge status.
Shock Correlations: Gold and the S&P 500
| Correlation | |
| First accident: January 26 to February 7, 2018 | -0.073 |
| Second accident: from September 21 to December 28, 2018 | -0.077 |
| Third accident: May 6 to June 6, 2019 | -0.407 |
| Fourth accident: from February 20 to March 28, 2020 | 0.241 |
| Fifth accident: January 1 to March 11, 2022 | -0.356 |
| Average correlation during accidents | -0.134 |
| Average correlation outside accidents | -0.060 |
The same cannot be said for bitcoin, or crypto in general. Outside of stock market declines, bitcoin and the S&P 500 have had a slight positive correlation of 0.129. Amid the stock market’s past five contractions, however, the correlation between bitcoin and the S&P 500 jumped to 0.258. In fact, only in two of the last five falls did the correlation turn negative. On the other hand, true to its hedging reputation, gold showed a negative correlation with the benchmark in four of the last five crashes.
Shock Correlations: Bitcoin and the S&P 500
| Correlation | |
| First accident: January 26 to February 7, 2018 | 0.814 |
| Second accident: from September 21 to December 28, 2018 | -0.025 |
| Third accident: May 6 to June 6, 2019 | -0.583 |
| Fourth accident: from February 20 to March 28, 2020 | 0.588 |
| Fifth accident: January 1 to March 11, 2022 | 0.493 |
| Average correlation during accidents | 0.258 |
| Average correlation outside accidents | 0.129 |
But what about bitcoin and gold? How has this relationship changed during recent panics and recessions? In equity markets, bitcoin and gold have a slight positive correlation of 0.057. Amid the stock market crash, the correlation only slightly increases to 0.064.
So, whatever the state of stock markets, the correlation between gold and bitcoin is pretty close to zero.
Shock Correlations: Bitcoin and Gold
| Correlation | |
| First accident: January 26 to February 7, 2018 | -0.194 |
| Second accident: from September 21 to December 28, 2018 | 0.107 |
| Third accident: May 6 to June 6, 2019 | 0.277 |
| Fourth accident: from February 20 to March 28, 2020 | 0.275 |
| Fifth accident: January 1 to March 11, 2022 | -0.179 |
| Average correlation during accidents | 0.057 |
| Average correlation outside accidents | 0.064 |
According to our data, crypto without a doubt it doesn’t act like digital gold. In times of panic, the correlation between crypto and the stock market actually increases. So whatever its proponents may say about its usefulness as a hedge against market declines, crypto has served more as an anti-hedge, with its correlation with the S&P 500 rising as stocks fall.
That said, given the lack of correlation between gold and crypto, the latter can add some diversification benefits to a portfolio.
However, the overall verdict is undeniable: when it comes to hedging capital risk, bitcoin and cryptocurrencies are more of a fool’s gold than digital gold.
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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.
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Derek Horstmeyer
Junchen Xia
Maciej Kowalski
