The outbreak of the coronavirus has disrupted our daily lives. Places that we enjoy our everyday life have become deserted, and we have had restrictions imposed on our day-to-day existence.
The anxiety from the pandemic is felt around the globe, and the recent changes in the financial sector reflects that this sentiment has spread globally.
The global anxiety from the coronavirus pandemic is reflected in the finance sector via big drops in index values as well as unprecedented volatility. Under these circumstances, people are looking for safe assets to minimize losses and to preserve capital.
Gold and US treasury bonds are well-known safe assets. If the financial market becomes volatile and uncertain, those asset's prices increase. It is often said that Bitcoin is a safe asset like gold and US treasury bonds. Bitcoin is a relatively new asset with only a 10-year history, but its non-inflationary nature and lack of government control make it attractive to investors that wish to avoid the perils of inflationary monetary policy.
The corona pandemic seems to be a test for Bitcoin and its status as a safe haven asset. If Bitcoin is considered as such, it should experience an increase in price similar to treasury bonds and gold. If so, then we could safely say that Bitcoin is expanding its power and earning trust among people.
Step 0. Plan the experiment
Hypothesis: If Bitcoin is recognized as a safe asset, then its price movement should be similar to that of gold and treasury because those two assets are safe assets.
To test the hypothesis, I designed the following series of correlation analysis to study the relationship between Bitcoin and four assets widely considered as safe options during a volatile market.
Assets to analyze
BTC against USD, S&P 500 index, gold, and US Treasury 10-year bond.
The analysis timeframes and their purpose
BTC against USD, S&P 500 index, gold, and US Treasury 10-year bond.
The analysis timeframes and their purpose
- Jan 2017 to March 2020
Purpose: Establish a general trend by studying historical data. - Feb 2020 to March 2020
Purpose: Study the effect of coronavirus pandemic and compare it to the established trend from the previous analysis.
Background on the chosen assets
The following four assets are considered safe-haven assets by a majority of investors.
The following four assets are considered safe-haven assets by a majority of investors.
- US Dollar
- S&P 500 index
- Gold
- US Treasury 10-year bond
Let's take a brief look at some of the unique characteristics pertinent to these assets.
USD is preferred when the market is extremely uncertain about the future because the value preserved in USD is relatively stable, and it is the most liquid and useful store of value on earth.
S&P 500 comprises of representative companies in the US industries. Stocks included in the index are considered safer than stocks that are not. Gold and the US treasury bonds are regarded as safe assets, so the price of those assets has historically increased when people feel fear, as history has shown us.
USD is preferred when the market is extremely uncertain about the future because the value preserved in USD is relatively stable, and it is the most liquid and useful store of value on earth.
S&P 500 comprises of representative companies in the US industries. Stocks included in the index are considered safer than stocks that are not. Gold and the US treasury bonds are regarded as safe assets, so the price of those assets has historically increased when people feel fear, as history has shown us.
So comparing Bitcoin with these assets should help us understand how Bitcoin is perceived. For the analysis, I used daily data from Jan 2017 to Mar 2020. The analysis could only cover the 3-year time frame due to lack of Bitcoin data before Jan 2017.
Step 1. Establish a general trend (baseline).
Our take? Analyze trend before corona pandemic period
1.1 Data preparation: scaled price graphs
Before starting the analysis, I want to draw your attention to the price chart of the 5 assets in question: Bitcoin, S&P 500, USD, Gold, and US Treasury Bonds. I applied data scaling on the five graphs for easy comparison.
You can see five asset prices from Jan 2017 to Mar 2020.
1.1 Data preparation: scaled price graphs
Before starting the analysis, I want to draw your attention to the price chart of the 5 assets in question: Bitcoin, S&P 500, USD, Gold, and US Treasury Bonds. I applied data scaling on the five graphs for easy comparison.
You can see five asset prices from Jan 2017 to Mar 2020.
The chart below contains all five graphs for comparison. The legend 'price' is Bitcoin's scaled price.
1.2 Perform correlation analysis on the assets
Our analysis is presented on daily log return data to understand the
potential correlation among those five assets. The results are shown on the table below:
Our analysis is presented on daily log return data to understand the
potential correlation among those five assets. The results are shown on the table below:
🙄What is the correlation, and how to read the value? Just remember three things.
- When two variables display similar movement, they have a positive correlation.
Ex) The price of A and B go up during the same time frame. - When two variables display the opposite movement, they have a negative correlation.
Ex) The price of A goes up, and the price of B goes down during the same time frame. - As a rule of thumb, we say that two variables have a very strong positive or negative relationship when the absolute value of their coefficient (value without +/- sign) is 0.6 or higher [Read more on this].
In the case of the USD, it has a negative relationship with gold (-0.357290). In other words, their prices moved in opposite directions during the given time frame. This makes sense because if USD is weak, people prefer to invest in gold to preserve capital. One of the principal factors involved in the weakening of the USD is US governmental actions that lead to printing more USD (Quantitative easing, Stimulus, etc.).
US Treasury bonds, when paired with USD, S&P 500, and gold, show a certain degree of correlation.
1.3 Conclusion for time frame #1: BTC shows no correlation with other assets.
The preliminary correlation analysis shows that Bitcoin does not correlate with four assets, namely USD, S&P 500, Gold, and US Treasury Bonds. In short, Bitcoin's price movement is independent of those four assets. S&P 500's price uptrend has nothing to do with Bitcoin's price movement.
US Treasury bonds, when paired with USD, S&P 500, and gold, show a certain degree of correlation.
1.3 Conclusion for time frame #1: BTC shows no correlation with other assets.
The preliminary correlation analysis shows that Bitcoin does not correlate with four assets, namely USD, S&P 500, Gold, and US Treasury Bonds. In short, Bitcoin's price movement is independent of those four assets. S&P 500's price uptrend has nothing to do with Bitcoin's price movement.
Step 2. Is BTC really a safe-haven asset during coronavirus pandemic?
Run the same analysis under the corona pandemic period and compare it. According to the correlation analysis, the movement of Bitcoin price is not closely connected to the four assets during the set time frame (January 2017 to March 2020). Now, we need to narrow down the time frame to answer our main question: is Bitcoin a safe asset or not? To find the answer, I zeroed in on the analysis time frame from Feb to Mar 2020. Let's take a closer look at the period and check the performance and correlation of the five assets.
Let's quickly review the conditions Bitcoin must meet in our analysis for the asset to safely claim its position as a safe-haven asset, and prove itself worthy of its moniker, digital gold.
Condition: If Bitcoin is recognized as a safe-haven asset, its price
movement should be similar to that of gold and treasury bonds because those two assets are considered safe assets by many.
In other words, the Bitcoin price is supposed to go up during the current coronavirus pandemic. Why? Because the demand would naturally go up as more people choose to invest in Bitcoin to preserve capital against other assets.
One of our analyses you really shouldn't miss is the one comparing Bitcoin and USD. In theory, USD is supposed to get weaker, and Bitcoin should get stronger under the current COVID-19 circumstance. Why? Many governments, especially the US, have been printing trillions of USD to overcome the economic recession caused by the coronavirus. This is called Quantitative easing (QE). A side effect of QE is that it lowers the real value (purchasing power) of USD due to the increase in the number of USD. This draws a stark contrast to Bitcoin, as the total amount of Bitcoin is fixed by design. In fact, Bitcoin was conceived mainly as a means of value protection against inflationary governmental policy following the 2008
financial crisis.
2.1 Data preparation: Asset performance under coronavirus
The most severe price drop among these assets was for the US treasury bonds; it dropped -54%; followed by Bitcoin at -31%, S&P 500 at -20%, gold at 0.9% and USD at 1.1%.
It is surprising to know that the US Treasury 10-year bond fared the worst of all 4 assets. Treasury bonds are a well-known safe-haven and are regarded as one of the better assets in a highly volatile market. Bitcoin's performance is also not impressive, at -31%, faring worse than S&P 500 index. Meanwhile, Gold and USD are doing relatively well. Interestingly, the USD is the winner in the coronavirus pandemic period, even though the US has implemented unprecedented unlimited QE to prevent a radical economic recession.
movement should be similar to that of gold and treasury bonds because those two assets are considered safe assets by many.
In other words, the Bitcoin price is supposed to go up during the current coronavirus pandemic. Why? Because the demand would naturally go up as more people choose to invest in Bitcoin to preserve capital against other assets.
One of our analyses you really shouldn't miss is the one comparing Bitcoin and USD. In theory, USD is supposed to get weaker, and Bitcoin should get stronger under the current COVID-19 circumstance. Why? Many governments, especially the US, have been printing trillions of USD to overcome the economic recession caused by the coronavirus. This is called Quantitative easing (QE). A side effect of QE is that it lowers the real value (purchasing power) of USD due to the increase in the number of USD. This draws a stark contrast to Bitcoin, as the total amount of Bitcoin is fixed by design. In fact, Bitcoin was conceived mainly as a means of value protection against inflationary governmental policy following the 2008
financial crisis.
2.1 Data preparation: Asset performance under coronavirus
The most severe price drop among these assets was for the US treasury bonds; it dropped -54%; followed by Bitcoin at -31%, S&P 500 at -20%, gold at 0.9% and USD at 1.1%.
It is surprising to know that the US Treasury 10-year bond fared the worst of all 4 assets. Treasury bonds are a well-known safe-haven and are regarded as one of the better assets in a highly volatile market. Bitcoin's performance is also not impressive, at -31%, faring worse than S&P 500 index. Meanwhile, Gold and USD are doing relatively well. Interestingly, the USD is the winner in the coronavirus pandemic period, even though the US has implemented unprecedented unlimited QE to prevent a radical economic recession.
2.2 Perform correlation analysis on the assets
The below four charts show correlations of these four assets with Bitcoin. The prices in the graph are scaled to Bitcoin price. Green triangles in the graph indicate the moments where the correlation coefficient is less than -0.3 (except gold). In other words, the green dots are the points where
the two prices are likely to move in the opposite direction. For example, If the USD price goes down, the BTC price goes up.
The below four charts show correlations of these four assets with Bitcoin. The prices in the graph are scaled to Bitcoin price. Green triangles in the graph indicate the moments where the correlation coefficient is less than -0.3 (except gold). In other words, the green dots are the points where
the two prices are likely to move in the opposite direction. For example, If the USD price goes down, the BTC price goes up.
Among all pairs, BTC-USD correlation analysis will give us the most meaningful insights since USD turns out to be the most stable asset during the coronavirus outbreak. Therefore, if BTC and USD have a consistently strong correlation, then it may indicate that that Bitcoin is regarded as a safe asset in the coronavirus pandemic (same applies with gold).
Below: 20 days rolling correlation data from Feb to Mar 2020. [What is rolling correlation?]
2.3 Conclusion: Our analysis shows that BTC and USD are correlated. However, it is unclear whether the correlation
is positive or negative. In March, before the 14th, Bitcoin price moved in the same direction as USD (positive correlation), but after the 14th, the direction was the opposite (negative correlation). The inconsistency reveals that it is too early to conclude the exact nature of their relationship.
is positive or negative. In March, before the 14th, Bitcoin price moved in the same direction as USD (positive correlation), but after the 14th, the direction was the opposite (negative correlation). The inconsistency reveals that it is too early to conclude the exact nature of their relationship.
On the other hand, gold shows some degree of correlation with Bitcoin from the middle of Feb. Even though the correlation is not a very strong one, the trend persists. If the price of gold rises, the Bitcoin price also increases. The "Digital Gold" moniker seems fitting when viewing this chart.
Our answer: Bitcoin is not a safe asset, at least under the current coronavirus pandemic.
Bitcoin price correlation was cross-referenced with four assets:
USD, S&P500, Treasury, and Gold, to answer the question of the day: is
Bitcoin a safe-haven asset? According to our analysis, Bitcoin is not a safe
asset, at least under the conditions created by the coronavirus pandemic. I
surmise that the extreme uncertainty in the financial market led people to
prefer USD. The considerable demand kept USD strong even in the face of the US government's QE policy.
USD, S&P500, Treasury, and Gold, to answer the question of the day: is
Bitcoin a safe-haven asset? According to our analysis, Bitcoin is not a safe
asset, at least under the conditions created by the coronavirus pandemic. I
surmise that the extreme uncertainty in the financial market led people to
prefer USD. The considerable demand kept USD strong even in the face of the US government's QE policy.
It is too early to conclude with certainty whether Bitcoin is a
haven asset or not. The number of transactions on the network and the trading volume show that there are still a lot of Bitcoin believers in the market.
haven asset or not. The number of transactions on the network and the trading volume show that there are still a lot of Bitcoin believers in the market.
A valuable insight we can draw from our analysis is this: the
independence that Bitcoin has amongst traditional assets renders it a good
asset for hedging.
independence that Bitcoin has amongst traditional assets renders it a good
asset for hedging.
In the long run, we believe people will prefer Bitcoin to the USD because the total amount of Bitcoin is fixed, whereas USD is not. While the USD is vulnerable to inflationary pressures as the US government can print as needed, Bitcoin is safe from governmental management.
While the status of Bitcoin as a safe haven asset is as of yet
unclear, the innate design that keeps Bitcoin immune to inflationary devaluation is very attractive to any investor keen to build stable portfolios in the New Normal era after the coronavirus gets under control.
unclear, the innate design that keeps Bitcoin immune to inflationary devaluation is very attractive to any investor keen to build stable portfolios in the New Normal era after the coronavirus gets under control.
(by James Ahn, CEO of EdenChain.io)