Since we are a multi-asset manager, many of our clients ask whether Bitcoin can act as a hedge against short to medium-term volatility of the stock market.
We like to use data to inform how we answer questions so we decided to take a look at:
- The correlation of rolling 1y returns of the S&P 500 vs Bitcoin and other assets that are commonly used to hedge the equity portion of portfolios
- How these same assets have performed during some of the more recent S&P 500 drawdown events
Key Finding 1: Bitcoin’s correlation to the S&P 500 has steadily increased since 2010
The table below shows 1yr return correlations between the S&P 500 and various assets. We have provided the tickers we used to proxy each asset class’s return.
There are two points we want to highlight in this table:
- Between Jan 1, 2010 and today, Bitcoin shows a 0.07 correlation to the S&P 500; but that low correlation appears to be heavily skewed by Bitcoin’s behavior in its early years. The correlation steadily rises to 0.77 since 2020 suggesting Bitcoin is acting more and more like a leveraged portfolio of equities than a non-correlated asset.
- No other asset in the table shows a correlation greater than 0.30 across the time periods assessed.
Key Finding 2: Bitcoin has generally experienced sharper drawdowns than the S&P 500 index during recent equity shocks
The table below shows the relative performance of each asset during notable events that led to significant drawdowns in the S&P 500 over the past 10 years.
- In three out of four of these events, Bitcoin experienced greater drawdowns than the S&P 500
- No other assets in the table below experienced sharper drawdowns than the S&P 500 during these events. In all drawdown events at least one of the other assets experienced gains.
Bitcoin does not appear to act as a volatility hedge for equity portfolios
These two analyses suggest Bitcoin has not historically functioned well as a short to medium term hedge to equities (as proxied by the S&P 500). Instead, it has exhibited an increasing correlation in recent years and has experienced significantly sharper drawdowns than the S&P 500 in three out of four of the shock events analyzed.
I’m not against clients holding bitcoin – that’s an individual decision depending on how much you allocate, your risk tolerance, and what your point of view on Bitcoin’s long term prospects are. However, this analysis suggests that holding it as a short to medium term hedge to volatility in stocks is not a role it has played well.
Hedges should exhibit low to negative correlation like some of the other assets in the analysis. When we design the hedge portions of our clients’ portfolios we are generally looking for assets that move more independently of equity holdings.
As a disclaimer, I have a small amount of bitcoin – out of interest in the underlying technology and as a way to more closely follow how the crypto markets evolve over time – not as a hedge to anything in my core portfolio.
Disclosures: This content is for educational purposes only and is not investment, tax, or legal advice. This post is not a solicitation for business. No post is an endorsement of any particular strategy or security. We do not receive any direct payments or commissions for securities discussed in our posts. Employees and clients of Kangpan & Co. may hold positions in securities discussed in posts. Speak with a licensed tax, legal, or financial advisor before making any changes to your investments or financial strategies. Past performance is no guarantee of future returns. Investing involves risk including the loss of capital.
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