Digital gold or fool’s gold: Crypto as a hedge for 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 crypto assets will act like so-called 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.

In 5 times over the last 5 years, the S&P 500 fell 7.5 per cent 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.