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.
Step 0. Plan the experiment
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.
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
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.
Step 1. Establish a general trend (baseline).
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.
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:
- 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].
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?
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.
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.
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.
Our answer: Bitcoin is not a safe asset, at least under the current coronavirus pandemic.
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.
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.
independence that Bitcoin has amongst traditional assets renders it a good
asset for hedging.
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.