Because gold is considered and well documented as a safe haven asset, a more valuable analysis of Bitcoin and gold’s relationship is in the way both assets behave in times of financial stress.
And it is during these specific periods that the inconsistent behaviour of Bitcoin presents itself.
In view of the “flight-to-quality” phenomenon (Hammoudeh, S.M., Yuan, Y., McAleer, M., & Thompson, M. A. (2010). International Review of Economics & Finance, 19, pp 633-647.) and safe-haven categorisation, during times of market turmoil or distress, the behaviour of the asset class is of particular interest.
Up to 2018, the stock market, represented by the S&P500 saw a period of relatively stable growth, marked by two short periods of market distress and significant shock-like declines during the stock sell-off of August 2015 and again late 2015 and early 2016.
In 2018, the S&P500 suffered one of its worst years in recent history, losing 6.59% in a year fraught with volatility. Bitcoin fared no better, with the bellwether cryptocurrency giving up over 70% in that year alone. In terms of correlation though, the S&P500 and Bitcoin showed hardly any correlation whatsoever (Figure 4), which in and of itself does not make Bitcoin a safe haven asset.
Figure 4: Spearman Correlation Coefficient for Bitcoin vs S&P500 for the period 3 October 2013 to 18 February 2020
More indicative is Bitcoin’s relationship with gold when overlaid during this period as well (Figure 5).
Figure 5: Spearman Correlation Coefficient for Bitcoin vs S&P500 (Gray) and Bitcoin vs Gold (Blue) for the period 3 October 2013 to 18 February 2020
During the period of August 2015 and late 2015 and early 2016, it is observed that Bitcoin’s correlation with gold trended negative, when investors fled to safety in gold, but abandoned more speculative assets such as Bitcoin. The same can be observed in 2018, when the S&P500 saw its largest single-day point drop, Bitcoin had close to zero correlation with gold.
First, it can be observed that correlations between gold and Bitcoin drop to zero or negative values in times of market distress.
In the first downturn, of August 2015, an observable change from positive to negative correlation and a turnaround during the subsequent market recovery was noted. The fall in correlation during the second period, from a high of +0.03 in late October 2015 to -0.11 in early January is quite significant. The behaviour can be expected especially if the safe haven property holds true and clearly reflects the “flight-to-quality” hypothesis in times of market distress.
The same pattern is reflected in late 2018, when a selloff in stocks saw a decline in the price of Bitcoin as well, while gold surged.
Given that the dataset does not include a prolonged market downturn, such as the financial crisis of 2008, the market reversals in 2015, 2016 and 2018 suggest that the “flight-to-quality” hypothesis postulated by Hammoudeh et al. persists.
More surprisingly however, gold may not even be a safe haven. From 2014, there are negative correlations in times of stable upward movements of the S&P500, making it entirely possible that gold acts more like a hedge than as a safe haven asset in recent years.
What makes the Bitcoin vs. S&P500 correlation fundamentally different from the correlations of gold and the S&P500 is the behaviour of the two asset classes during market distress. Interestingly, correlations are steeply increasing from a negative to a positive relationship when the S&P500 is a downward trend, which indicates that Bitcoin has a tendency to follow the downturn. While gold prices tend to increase with the “flight-to-quality” Bitcoin prices decrease along with the markets and risk appetite.
Zooming in on 2017, when Bitcoin’s price surge started in the second quarter, Bitcoin and gold are uncorrelated on average in the second and third quarter of 2017, remaining firmly in negative territory. Yet in the fourth quarter, gold and Bitcoin seem to couple again, coinciding with strong price increases in Bitcoin, decoupling again shortly after when Bitcoin drops while gold surges upwards, leading once again to the observation that there is no stable correlation between Bitcoin and gold.
The correlation with between Bitcoin and gold is characterised by positive and negative spikes with no general tendency, yet one would assume this correlation to be positive and stable if one believed Bitcoin to be similar to gold.
And while gold may be more akin to a hedge than a safe haven asset in its purest sense, Bitcoin may be neither, coupling with markets during bearish environments, as it did in 2018, with correlations rapidly turning positive.
From 2016 to 2018 especially, there are observable inverse movements of correlations of gold with Bitcoin and the S&P500. When correlations increase between gold and the S&P500, Bitcoin correlations decrease with the S&P500, which strongly suggest that gold and Bitcoin have a different quality of connectedness with the markets.
