Summary: We manage alternative assets for high-earning and high net worth clients. We frequently get asked whether Bitcoin can act as a hedge against short to medium-term volatility of the stock market. Our analyses found the contrary:
- Bitcoin’s correlation to the S&P 500 has steadily increased since 2010
- Bitcoin has generally experienced sharper drawdowns than the S&P 500 index during recent equity shocks
What is Bitcoin’s Correlation to the S&P 500?
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 1: Bitcoin’s correlation to the S&P 500 has steadily increased since 2010
Does Bitcoin Protect Against Stock Market Crashes?
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.
Key Finding 2: Bitcoin has generally experienced sharper drawdowns than the S&P 500 index during recent equity shocks
Bitcoin does not appear to act as a 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. But I do not hold it as hedge to anything in my core portfolio.
Nathan
Founder & Lead Advisor
[email protected]
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Kangpan & Co. is a flat-fee financial advisory firm specializing in helping mid-career professionals navigate the career, family, and financial tradeoffs that come with this stage of life. This content is for educational purposes only and is not financial, legal, or tax advice. Consult a licensed advisor for help with your individual situation. Employees and clients of Kangpan & Co. may hold positions discussed in our content. Past performance is no guarantee of future results.