The researchers looked at the correlation between bitcoin, gold and the S&P 500 over the past five periods of recession.
The status of cryptoassets as a perceived safe haven in the face of stock market volatility has been severely undermined this year, with the sector in free fall alongside equities.
Bitcoin, which was trading around US$20,000 on July 26, has lost more than 50% of its value this year. The S&P 500 closed the day on July 25 with a decline of nearly 17% over the same period.
But how have bitcoin, gold and stocks fared in other recent declines? A team of researchers from George Mason University in Virginia looked at 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-19 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 stocks during declines: an average negative correlation of -0.134 versus a slight positive correlation of 0.060 outside of large declines.
“Gold offers some protection in bear markets and lives up to its status as a perennial hedge,” the study concludes.
This is not the case with bitcoin. Outside of the big stock declines, the correlation between cryptocurrency and the S&P 500 was slightly positive, at 0.129. This correlation increased, on average, to 0.258 during the five phases of decline.
The Bitcoin/S&P 500 correlation was strongly negative (-0.583) during the 2019 decline. However, the correlation was 0.588 during the initial crash of the pandemic and 0.493 in the first two months of this year, according to the study.
The researchers also compared bitcoin and gold. They found that their correlation was slightly positive both in the rising markets (0.057 on average) and during the five phases of decline (0.064 on average).
The study concludes that bitcoin is more “crazy gold” than “digital gold” during market panics, as its correlation with the S&P 500 increases.
“Whatever its proponents say, cryptocurrency has instead served as an anti-hedging, with its correlation with the S&P 500 increasing when stocks fall,” the study says.
“That said, given the lack of correlation between gold and cryptocurrency, the latter can add some diversification benefits to a portfolio.”
