History Suggests: Buy Bitcoin When There's Blood in the Streets

History Suggests: Buy Bitcoin When There's Blood in the Streets

Subscribe to get the weekly CIO Memos sent right to your inbox.

By Juan Leon, Senior Investment Strategist


According to the data, long-term investors may be better off flocking to bitcoin than gold when stocks sell off.


Global stock markets panicked on August 5. Japan’s Nikkei Stock Average fell 12%, its worst day since 1987. The S&P 500 closed down 3%.

Bitcoin, unfortunately, didn’t fare any better, nosediving 14.52% between August 2 and August 5. The sharp pullback elicited a great deal of questions from the media: Why did bitcoin stumble as a hedge? Is bitcoin really a hedge asset at all?

Intrigued, I decided to dig into the historical data.

Specifically, I analyzed every daily drop of 2% or more in the S&P 500 over the last decade, looking at how both bitcoin and gold reacted. I then categorized their returns into three buckets, based on how each asset performed on the day the S&P 500 fell:

  • Perfect hedge – the asset provided a positive return
  • Partial hedge – the asset provided a negative return, but did better than the S&P 500
  • No hedge – the asset delivered a worse return than the S&P 500

What I uncovered was both revealing and more nuanced than what is typically reported. 

Is Bitcoin a Short-Term Hedge? Not Really.

Let’s start with the bad news for bitcoin: The data shows that bitcoin is an unreliable short-term hedge. In fact, its one-day return seems to have no relationship to what's happening in the stock market at all.

A little more than half the time—59% to be exact—it has served as a kind of hedge, either rising sharply or falling less than stocks on big down days for the S&P 500. But the other 41% of the time it fell more than the index.

Unfortunately, when this happens, things tend to get ugly: On days when stocks are down 2% or more and bitcoin underperforms, it really tumbles, losing 7.80% on average.

What this tells me is that not all one-day pullbacks are created equal. There are, of course, different reasons stocks fall 2% on a given day. The data suggest that some of these reasons cause bitcoin to rise sharply and some cause bitcoin to fall sharply; there is no hard-and-fast rule.

If you're looking for a foolproof one-day hedge against sharp stock market pullbacks, bitcoin is not a good choice.


Bitcoin

Source: Bitwise Asset Management with data from Bloomberg. Data from Jan. 1, 2014 to Aug. 9, 2024.


Gold

Source: Bitwise Asset Management with data from Bloomberg. Data from Jan. 1, 2014 to Aug. 9, 2024.


Gold performs better, although its performance is mixed: It has delivered a positive return 54% of the time the S&P 500 falls sharply, but on average, it’s risen just 1.05% during these times. That makes it challenging as an effective short-term hedge: You have to own a great deal of it to make a real impact on your overall portfolio. If you have 5% of your portfolio in gold, that 1% move doesn’t do much to blunt a pullback in the traditional 60% stock allocation of your portfolio. The other 46% of the time it’s fallen 0.99% on average, contributing to portfolio losses.

Fortunately, most of us don’t invest for one day; we invest for the long term. And so, I wondered, how have these two assets performed as a long-term hedge to these one-day shocks? 

Historically, Is Bitcoin a Long-Term Hedge? Absolutely. 

The track record for these two assets measured over a full year tells an entirely different story. In the year following a 2% or greater pullback in stocks, gold averages a 7.88% return, substantially underperforming the bounce in stocks. Bitcoin, however, more than makes up for its volatility with a staggering average return of 189.68%. 


Average Returns in the Year After a Major Drop in the S&P 500

Source: Bitwise Asset Management with data from Bloomberg. Data from Jan. 1, 2014 to Aug. 9, 2024.


This dynamic makes sense. Gold is a trusted asset, which many flock to reflexively during short-term panics. But its mature status means it underperforms over longer periods. Bitcoin, with its capped supply and decreasing issuance, has strong store-of-value properties, but is still early in its adoption phase. As such, it still has elements of being a risk asset. This means more variability in its one-day response to market pullbacks, but substantially better returns the longer you look out.

For the last decade of returns, the record is clear: When markets pull back, buying bitcoin has been rewarded. 

Will Bitcoin Outperform Again? 

The easiest criticism of this analysis is that past performance is no guarantee of future performance. And while perhaps this time could be different, the 12-month outlook for bitcoin is one of the most bullish I’ve seen.

Consider the following potential catalysts:

  1. Spot Bitcoin ETP Inflows: Since January, inflows into Bitcoin ETPs have topped $17 billion and outpaced new supply, pushing bitcoin to an all-time high earlier this year. These inflows don't even include some of the biggest players. Last week, Morgan Stanley became the first wirehouse to approve Bitcoin ETPs on their platform. We expect Merrill Lynch, UBS, Wells Fargo, and others to follow suit.
  2. Regulatory Tailwinds: A bipartisan coalition in Congress has ushered three crypto bills through the House of Representatives this year. With the GOP incorporating crypto into its official 2024 platform and the Harris campaign reevaluating its stance, the industry is on the cusp of regulatory clarity.
  3. Fed Rate Cuts: The European Central Bank, the Bank of England, and others have already begun to cut rates. With U.S. inflation easing and softer economic data stoking recession fears, the Fed must catch up. Fed funds futures are already anticipating cuts at the September meeting.

Are we out of the woods yet? Probably not. Investors are still on edge from the market swings triggered by the unwinding of the yen carry trade. Throw in the uncertainty of the U.S. presidential election, signs of a slowing global economy and the looming threat of an Iran-Israel conflict, and you have a recipe for more turmoil ahead. But next time stocks sell off, you’ll know which asset has stood out as the superior long-term hedge.


Risks and Important Information

No Advice on Investment; Risk of Loss: Prior to making any investment decision, each investor must undertake its own independent examination and investigation, including the merits and risks involved in an investment, and must base its investment decision—including a determination whether the investment would be a suitable investment for the investor—on such examination and investigation.

Crypto assets are digital representations of value that function as a medium of exchange, a unit of account, or a store of value, but they do not have legal tender status. Crypto assets are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not currently backed nor supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies, stocks, or bonds.

Trading in crypto assets comes with significant risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks and risk of losing principal or all of your investment. In addition, crypto asset markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.

Crypto asset trading requires knowledge of crypto asset markets. In attempting to profit through crypto asset trading, you must compete with traders worldwide. You should have appropriate knowledge and experience before engaging in substantial crypto asset trading. Crypto asset trading can lead to large and immediate financial losses. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price.

The opinions expressed represent an assessment of the market environment at a specific time and are not intended to be a forecast of future events, or a guarantee of future results, and are subject to further discussion, completion and amendment. The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein.


To view or add a comment, sign in

Insights from the community

Others also viewed

Explore topics