Crypto enthusiasts often argue that digital coins and tokens are not correlated with equities and can serve as a safe haven during stock market crashes. The belief is that cryptoassets function like “digital gold,” providing a hedge against equity risk and helping investors weather downturns.
These bold claims warrant examination, especially in light of the current bear market for stocks. So, we analyzed how crypto has performed during previous crashes. Specifically, we examined the major panic events that have occurred over crypto’s relatively short history and studied the correlation between this new asset class and some traditional peers.
Over the past five years, the S&P 500 has experienced five declines of 7.5% or more. During each of these instances, we measured how correlations changed between gold and the S&P 500, bitcoin and the S&P 500, and bitcoin and gold. We also looked at the correlations between other cryptocurrencies and gold and the S&P 500, finding qualitatively similar results, and for simplicity, we used bitcoin as a proxy for crypto as a whole.
The correlation between gold and the S&P 500 behaved as anticipated. In periods of normal market conditions, gold and the S&P 500 have a slight positive correlation of 0.060. However, during stock market declines, their average correlation drops to -0.134, indicating that gold does offer some protection in down markets and lives up to its reputation as a hedge.
Crash Correlations: Gold and the S&P 500
| Correlation | |
| First Crash: 26 Jan. to 7 Feb. 2018 | -0.073 |
| Second Crash: 21 Sep. to 28 Dec. 2018 | -0.077 |
| Third Crash: 6 May to 6 June 2019 | -0.407 |
| Fourth Crash: 20 Feb. to 28 March 2020 | 0.241 |
| Fifth Crash: 1 Jan. to 11 March 2022 | -0.356 |
| Average Correlation during Crashes | -0.134 |
| Average Correlation Outside of Crashes | -0.060 |
The story is different for bitcoin and crypto in general. Under normal market conditions, bitcoin and the S&P 500 have a slight positive correlation of 0.129. However, during the last five stock market contractions, the correlation between bitcoin and the S&P 500 increased to 0.258. In only two of the past five downturns did the correlation turn negative. In contrast, gold exhibited a negative correlation with the benchmark index in four out of the last five crashes, aligning with its reputation as a hedge.
Crash Correlations: Bitcoin and the S&P 500
| Correlation | |
| First Crash: 26 Jan. to 7 Feb. 2018 | 0.814 |
| Second Crash: 21 Sep. to 28 Dec. 2018 | -0.025 |
| Third Crash: 6 May to 6 June 2019 | -0.583 |
| Fourth Crash: 20 Feb. to 28 March 2020 | 0.588 |
| Fifth Crash: 1 Jan. to 11 March 2022 | 0.493 |
| Average Correlation during Crashes | 0.258 |
| Average Correlation Outside of Crashes | 0.129 |
Now, what about bitcoin and gold? How has their relationship changed during recent panics and downturns? In rising equity markets, bitcoin and gold have a slight positive correlation of 0.057. During stock market crashes, the correlation only increases slightly to 0.064.
Therefore, regardless of the state of the equity markets, the correlation between gold and bitcoin remains close to zero.
Crash Correlations: Bitcoin and Gold
| Correlation | |
| First Crash: 26 Jan. to 7 Feb. 2018 | -0.194 |
| Second Crash: 21 Sep. to 28 Dec. 2018 | 0.107 |
| Third Crash: 6 May to 6 June 2019 | 0.277 |
| Fourth Crash: 20 Feb. to 28 March 2020 | 0.275 |
| Fifth Crash: 1 Jan. to 11 March 2022 | -0.179 |
| Average Correlation during Crashes | 0.057 |
| Average Correlation Outside of Crashes | 0.064 |
Based on our analysis, it is evident that crypto does not effectively act as digital gold. During times of panic, the correlation between crypto and the stock market actually increases. Therefore, despite claims about its usefulness as a hedge against market downturns, crypto has functioned more as an anti-hedge, with its correlation with the S&P 500 rising as stocks plunge.
However, given the lack of correlation between gold and crypto, incorporating crypto into a portfolio may provide some diversification benefits.
Nevertheless, the overall verdict is clear: When it comes to hedging equity risk, bitcoin and cryptocurrencies are more akin to fool’s gold than digital gold.
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All opinions expressed in this article are those of the author and do not constitute investment advice. The views expressed may not reflect those of CFA Institute or the author’s employer.
Image credit: ©Getty Images/Moonstone Images
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