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Seeking Alpha 2022-07-12 15:52:00

Digital Gold Or Fool's Gold: Is Crypto Really A Hedge Against Equity Risk?

Crypto enthusiasts often claim that digital coins and tokens are uncorrelated with equities and can provide a safe haven amid stock market crashes.Based on our data, crypto certainly does not act like digital gold. In times of panic, the correlation between crypto and the stock market actually increases.When it comes to hedging equity risk, bitcoin and cryptocurrencies are more fool’s gold than digital gold.Crypto enthusiasts often claim that digital coins and tokens are uncorrelated with equities and can provide a safe haven amid stock market crashes. The assumption is that cryptoassets will act like “digital gold,” serving as a hedge against equity risk, and help investors ride out such downturns.Such bold claims beg for examination, especially amid what looks like a bear market for stocks. So, we explored how crypto has performed during previous crashes. In particular, we isolated the major panic events over crypto’s short history and studied the correlation between this new asset class and some of its more traditional peers.Five times over the last five years, the S&P 500 fell 7.5% or more. In 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 examined the correlations between other cryptocurrencies and gold and the S&P 500 as well but found the results were qualitatively similar, so we used bitcoin as a proxy for cry...