Bitcoin is often accused of being a poor store of value given its weaknesses during stock market downturns. So what?
Factual correlation between bitcoin and the stock market
The correlation between bitcoin and the US stock market has been on display again recently. It was particularly clear on Monday, August 5, when the S&P 500 fell by almost 5%.
That was all it took for Nassim Taleb to take the opportunity to explain to us once again that bitcoin is neither a store of value nor digital gold:
NYDIG looked at the question by comparing bitcoinâs performance to gold and U.S. Treasuries â assets that investors might quickly turn to in times of stress. To do this, NYDIG looked at the biggest daily declines in the S&P 500 index since 2011 to make the comparisons.
One of the key takeaways from this analysis is that US Treasuries act as a safe haven in the event of a stock market decline. They appreciated 72% of the time when the stock market was in severe decline. The average appreciation was 0.74% over the day.
In contrast, the average appreciation of gold was meager (+0.01%). The barbaric relic appreciated only 56% of the time. In other words, gold is much less efficient than Treasury bonds in hedging against stock market falls.
As for bitcoin, it is also not useful in the event of a sudden stock market drop. The correlation is positive, even if relatively weak.
While bitcoin may offer some hedging benefits in a portfolio, it is not in the face of sharp daily declines in the S&P 500.
And during the âdrawdownsâ?
A drawdown is the decline of an asset (such as the S&P 500) from its peak before it recovers to the high. It is essentially a percentage measure of downward volatility. Drawdowns can last for weeks, months, or years.
For example, here is the graph of the drawdowns of bitcoin (purple) and the S&P 500 (green) since January 2015:
NYDIG reviewed every S&P 500 drawdown of more than 5% since the start of 2011. The conclusions are largely the same.
Gold remains an unreliable hedge while US Treasuries (long term) remain the best hedge in every respect.
The same is true for bitcoin, which nevertheless shines clearly when the stock market moves forward again. In this regard, note that the S&P 500 is currently on the verge of setting a new all-time high.
To sum up, bitcoin is not a hedge against the whims of the stock market. NYDIG believes this is because bitcoin is a highly liquid market that never closes:
âOur theory is that bitcoinâs deep liquidity allows investors to express their opinions outside of traditional market hours (recent price movements over the weekend were very telling). Itâs important to keep in mind that bitcoinâs correlations and price fluctuations are simply reflections of collective human behavior, rather than inherent characteristics of the asset itself,â NYDIG says.
Bitcoin is inherently the best store of value in human history. Its high volatility is the modest price to pay for those fortunate enough to invest early.
Finally, letâs note that any investor faces a wide range of risks. Even keeping your money under the mattress carries risks such as inflation. It was 25% over the last three years. During this time, bitcoin appreciated by 25%âŠ
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