Crypto enthusiasts often claim that digital coins and tokens are uncorrelated with stocks and may provide a shelter during stock market crashes. Cryptoassets are believed to act like “digital gold,” acting as a hedge against equity risks and helping investors weather such downturns.
Such daring claims deserve closer scrutiny, especially in what looks like a bear marketplace for stocks. That’s why we examined how crypto has fared in previous crashes. Specifically, we isolated the largest panic events in crypto’s short history and examined the correlation between this recent asset class and a few of its more traditional counterparts.
Five times within the last five years the S&P 500 fell 7.5% or more. In each of those cases, we measured how the correlations between gold and the S&P 500, Bitcoin and the S&P 500, and Bitcoin and gold modified. We also examined the correlations between other cryptocurrencies and gold and the S&P 500, but found that the outcomes were qualitatively similar, so we used Bitcoin as a proxy for cryptocurrencies on the whole.
The correlation between gold and the S&P 500 was as expected. Outside of major downturns, gold and the S&P 500 have only a rather positive correlation of 0.060. But when the S&P 500 crashes, so does its average correlation with gold, which falls to -0.134. The takeaway is evident: gold offers some protection in down markets and lives as much as its status as a everlasting hedge.
Crash Correlations: Gold and the S&P 500
| correlation | |
| First crash: January 26 to February 7, 2018 | -0.073 |
| Second crash: September 21 to December 28, 2018 | -0.077 |
| Third crash: May 6 to June 6, 2019 | -0.407 |
| Fourth crash: February 20 to March 28, 2020 | 0.241 |
| Fifth crash: January 1 to March 11, 2022 | -0.356 |
| Average correlation in crashes | -0.134 |
| Average correlation outside of crashes | -0.060 |
The same can’t be said for Bitcoin – or crypto on the whole. Barring stock market downturns, Bitcoin and the S&P 500 have a rather positive correlation of 0.129. However, amid the last five stock market declines, the correlation between Bitcoin and the S&P 500 jumped to 0.258. In fact, the correlation turned negative in just two of the last five downturns. On the opposite hand, gold, true to its popularity as a hedge, has had a negative correlation with the benchmark index in 4 of the last five crashes.
Crash Correlations: Bitcoin and the S&P 500
| correlation | |
| First crash: January 26 to February 7, 2018 | 0.814 |
| Second crash: September 21 to December 28, 2018 | -0.025 |
| Third crash: May 6 to June 6, 2019 | -0.583 |
| Fourth crash: February 20 to March 28, 2020 | 0.588 |
| Fifth crash: January 1 to March 11, 2022 | 0.493 |
| Average correlation in crashes | 0.258 |
| Average correlation outside of crashes | 0.129 |
But what about Bitcoin and gold? How has this relationship modified throughout the recent panics and downturns? With stock markets rising, Bitcoin and gold have a rather positive correlation of 0.057. During stock market crashes, the correlation increases only barely to 0.064.
Regardless of the situation on the stock markets, the correlation between gold and Bitcoin is pretty near zero.
Crash Correlations: Bitcoin and Gold
| correlation | |
| First crash: January 26 to February 7, 2018 | -0.194 |
| Second crash: September 21 to December 28, 2018 | 0.107 |
| Third crash: May 6 to June 6, 2019 | 0.277 |
| Fourth crash: February 20 to March 28, 2020 | 0.275 |
| Fifth crash: January 1 to March 11, 2022 | -0.179 |
| Average correlation in crashes | 0.057 |
| Average correlation outside of crashes | 0.064 |
Based on our data, crypto actually not appear to be digital gold. During times of panic, the correlation between crypto and the stock market actually increases. Whatever its proponents may say about its usefulness as a hedge against market downturns, cryptocurrencies have served more as a counter-hedge because their correlation with the S&P 500 increases when stock prices fall.
However, given the shortage of correlation between gold and cryptocurrencies, the latter can bring some diversification advantages to a portfolio.
Still, the general verdict is undeniable: When it involves hedging equity risk, Bitcoin and cryptocurrencies are more idiot’s gold than digital gold.
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Photo credit: ©Getty Images/Moonstone Images
