Gold and Bitcoin vs Stock Market Crash
Even in the most exuberant stock market rally, there is always the latent threat of a crash.
Gold, the classic defensive safe haven asset, has been used to fortify investment portfolios against this threat for as long as the stock market has existed, but now a new breed of investors believe that bitcoin — or “digital gold” can provide similar protection.
As bitcoin is only eleven years old, proving the asset’s value as a hedge against crashes is difficult, but we can still look back over the past decade to find out how bitcoin and gold have behaved as sudden turbulence has hit the stock market.
COVID-19 Crash, 2020
Stocks plummeted in early March 2020 as the coronavirus hit Italy and Iran hard and governments around the world weighed the cost of hitting pause on the economy.
Gold initially dropped slightly as traders rushed to buy dollars, but then started to trend upwards as fear overwhelmed the markets.
Bitcoin meanwhile, dipped even deeper than the stock market. The leading crypto shed 50% of its value over 24 hours, before recovering over the next few weeks to reclaim its former highs before the S&P 500.
Global Downturn, 2018
Stocks took a tumble in December 2018 as a miasma of negative macroeconomic events overwhelmed the market. Fears of a U.S. government shutdown, and concerns about the direction of Fed policy, coincided with trade war worries to pull the S&P 500 down 15% over 20 days.
Gold meanwhile pushed steadily upwards in classic safe haven style.
Bitcoin however, also crashed with stocks, just like a risk-on asset.
China’s ‘Black Monday’, 2015
Stocks around the world fell in the summer of 2015 as China’s stock market bubble popped. This, combined with falling petrol prices, the Greek debt default in June 2015, and the Brexit vote, sent markets into a storm of volatility that lasted for much of the year.
With so much quantitative easing having occurred over previous years, market commentators began to question whether central bankers actually had the ammunition to prevent a major crash, leading more fear into the market. In total, the S&P 500 dropped 10% during the month of August.
Gold pushed up slightly during August and then traded flat for the rest of the year.
Bitcoin was already on a losing streak at the time, and ultimately lost around 30% of its value in August before starting another bull run to eventually reach new highs.
European Debt Crisis Crash, August 2011
Stocks dropped in the summer of 2011 on concerns over sovereign debt in South Europe and fears of slow economic growth in the states. This created a rollercoaster of volatility for stock indices.
Gold took the opposite path to the stock market during August and pushed upwards — providing a great hedge for stock investors. Then it traded mostly flat during the rest of the year.
Bitcoin was caught in what many thought was a death spiral in 2011, and was plunging rapidly towards earth after the collapse of the Tokyo-based Mt Gox exchange.
Bitcoin vs Stock Market Crash
As the examples show, each significant stock market crash during the last decade has also been accompanied by a drop in the price of bitcoin. And in the recent crashes of March 2020 and December 2018, bitcoin has moved almost completely in lockstep with stocks.
Some analysts suggest this correlation is because of the increased presence of institutions— trading on new professional platforms like CME and Bakkt—that treat bitcoin as a risky proposition and lump it in the same asset category as stocks. But while bitcoin might be gradually becoming more impacted by the movements of global markets, the price action is still primarily governed by sentiment, and internal technical developments like the halving.
Ultimately, the ability of bitcoin to act as a hedge against stock market crashes has not yet been proven. Most portfolio managers therefore recommend the asset should be held not because it has an inverse correlation with stocks, but because it has no real correlation with other markets.
Gold vs Stock Market Crash
Gold is the battle-tested hedge against stock market volatility. It has protected investors against stock market crashes not just in the past decade—as the examples show—but over the past few centuries.
This has been verified not just by my cursory glance over the past decade, but by an in-depth 2007 study from Trinity College. Researchers investigated whether the ability of gold to act as a hedge could be backed-up by its behaviour since 2000 in stock market crashes. By looking at the average accumulated return of a portfolio comprising gold and stocks for the period of 50 trading days after “an extreme negative stock return”, the study found that gold acts a safe haven asset for stocks in the United States, in the United Kingdom and in Germany.
“For 15 days after a crash, gold prices increased dramatically. Frightened investors panicked, sold their stocks and bought gold.” concludes the study. “After that, gold prices lost value against rebounding stock prices.
As the researchers found, gold effectively acts as an insurance premium that will likely pay out when most needed. Though the price may fluctuate over the long term, during extreme market conditoins it has historically risen — making gold a proven hedge against stock market crashes.