Practical analysis for investment professionals
12 July 2022

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. 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.

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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 crypto in general.

The correlation between gold and the S&P 500 came in as expected. Outside of major downturns, gold and the S&P 500 have just a slight positive correlation of 0.060. Yet, when the S&P 500 plunges, so does its average correlation with gold, which drops to –0.134. The takeaway is clear: Gold does offer some protection in down markets and lives up to its status as a perennial hedge.

Crash Correlations: Gold and the S&P 500

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 20200.241
Fifth Crash: 1 Jan. to 11 March 2022–0.356
Average Correlation during Crashes–0.134
Average Correlation Outside of Crashes–0.060

The same cannot be said for bitcoin — or crypto in general. Outside of equity market downturns, bitcoin and the S&P 500 have had a slight positive correlation of 0.129. Amid the last five stock market contractions, however, the correlation between bitcoin and the S&P 500 jumped to 0.258. Indeed, in only two of the past five downturns did the correlation turn negative. On the other hand, true to its hedge-y reputation, gold exhibited a negative correlation with the benchmark index in four out of the last five crashes.

Crash Correlations: Bitcoin and the S&P 500

First Crash: 26 Jan. to 7 Feb. 20180.814
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 20200.588
Fifth Crash: 1 Jan. to 11 March 20220.493
Average Correlation during Crashes0.258
Average Correlation Outside of Crashes0.129

But what about bitcoin and gold? How has that relationship changed during recent panics and downturns? In rising equity markets, bitcoin and gold have a slight positive correlation of 0.057.  Amid stock market crashes, the correlation rises only slightly to 0.064.

So, whatever the state of the equity markets, the correlation between gold and bitcoin is pretty close to zero.

Crash Correlations: Bitcoin and Gold

First Crash: 26 Jan. to 7 Feb. 2018–0.194
Second Crash: 21 Sep. to 28 Dec. 20180.107
Third Crash: 6 May to 6 June 20190.277
Fourth Crash: 20 Feb. to 28 March 20200.275
Fifth Crash: 1 Jan. to 11 March 2022–0.179
Average Correlation during Crashes0.057
Average Correlation Outside of Crashes0.064

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. So, whatever its proponents may say about its utility as a hedge against market downturns, crypto has served as more of an anti-hedge, with its correlation with the S&P 500 rising as stocks plunge.

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That said, given the lack of correlation between gold and crypto, the latter may add some diversification benefits to a portfolio.

Nevertheless, the overall verdict is undeniable: When it comes to hedging equity risk, bitcoin and cryptocurrencies are more fool’s gold than digital gold.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images/Moonstone Images

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About the Author(s)
Derek Horstmeyer

Derek Horstmeyer is a professor at George Mason University School of Business, specializing in exchange-traded fund (ETF) and mutual fund performance. He currently serves as Director of the new Financial Planning and Wealth Management major at George Mason and founded the first student-managed investment fund at GMU.

Junchen Xia

Junchen Xia is a current senior at George Mason University pursuing a BS in finance. She is a Dean Finance Scholarship Recipient and a Phi Kappa Phi and Honors Program member. With a solid foundation in finance and accounting theories and applications, she is a teaching assistant for financial management at George Mason University. She is preparing for the CFA level I exam and has actively participated in the CFA Research and Ethics Challenge. She has skills in financial analysis, modeling, Python, and R. She is interested in pursuing a career as a financial analyst.

Maciej Kowalski

Maciej Kowalski is a senior at George Mason University pursuing a BS in economics with a minor in finance. He plans to continue his education seeking a master's level degree in economics and finance and working towards his CFA certification. He is interested in wealth management, retirement planning, securities investments, and the airline industry.

3 thoughts on “Digital Gold or Fool’s Gold: Is Crypto Really a Hedge against Equity Risk?”

  1. Rohma Charlotte says:

    This article is an insightful look into the correlation between crypto and equity investments. It is important to understand the relationship between the two asset classes and this article is an excellent exploration of the topic.

  2. eBullion Pvt Ltd says:

    Absolutely fascinating read! These uncharted waters, crypto’s allure as a hedge against equity risk is undeniable. However, with volatility as its shadow, due diligence is key. Diving deep into the correlation dynamics between digital gold and traditional assets is a must. A balanced portfolio is like a well-crafted recipe, and understanding if crypto is the secret ingredient or fools’ gold makes all the difference. Kudos to the author for shedding light on digital gold and crypto

  3. Venkata Panchumarthi says:

    Hi, I am Venkata Panchumarthi. I read this article and it is very informative. I like the way you explained about the topic. Thank you so much for sharing all this wonderful info. It is so appreciated!!!

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