Bitcoin’s Hedging Efficiency within the Wake of the Coronavirus Outbreak

The latest coronavirus outbreak has far-reaching penalties past the unfold of the illness and efforts to quarantine it. Not too long ago, we’ve skilled one of the vital extreme inventory market crashes in fashionable instances: On March 9, 2020, the Dow Jones Industrial Common recorded a drop of -7.8%, which occurred to be its worst single-day loss ever. Nonetheless, on Thursday, March 12, 2020, the Dow then recorded the fifth-largest drop in fashionable historical past based mostly on share factors by a staggering quantity of virtually 10%. Sadly, the losses didn’t cease there. 4 days later, on March 16, the Dow hit a brand new document of virtually 13%. Because the COVID-19 outbreak turned a world challenge, it’s unsurprising that fairness markets worldwide have skilled extreme losses.

In acknowledging the flexibility of Bitcoin (BTC) to hedge inventory market threat, some economists and researchers discuss with Bitcoin as “digital gold.” Some research argue that Bitcoin is uncovered to tail-risk solely inside the crypto markets, however it isn’t uncovered to tail-risk with respect to different asset markets, resembling fairness markets or gold. Nonetheless, the latest COVID-19 outbreak is a tail-risk occasion — or what Nassim Taleb refers to as a so-called “Black Swan” as a result of it’s an outlier — and it carries an excessive and consequential impression.

Associated: Is Bitcoin a Retailer of Worth? Consultants on BTC as Digital Gold

In my latest research, I explored the dynamic correlation between Bitcoin and United States shares throughout the COVID-19 outbreak, utilizing a so-called difference-in-differences strategy. Because the potential impression on the dynamic correlation between Bitcoin and U.S. shares was unpredictable (and due to this fact unsure), the research makes use of the COVID-19 outbreak as a quasi-experimental setting. In doing so, the research makes use of the dynamic correlation between Bitcoin and U.S. shares as a therapy group, whereas the dynamic correlation between gold and U.S. shares serves because the management group.

Surprisingly, the research discovered that Bitcoin carried out poorly in hedging this Black Swan occasion. Particularly, utilizing a 20-day rolling-sample window to estimate the empirical distribution of the realized dynamic correlation, the realized correlation between Bitcoin and U.S. shares was -0.0208 within the interval from April 17, 2015, to October 31, 2019, which is used as a before-the-event pattern on this research. Confirming earlier research, the correlation was insignificant.

Because the World Well being Group characterised COVID-19 as a pandemic on March 11, 2020, the research employed the pattern from March 12, 2020, to March 18, 2020, as an after-the-event interval. Apparently, the correlation between Bitcoin and U.S. shares was 0.6353 within the after-the-event pattern interval and statistically important. Controlling for gold confirms this consequence.

Whereas the research exhibits that gold, certainly, lived as much as its expectation to function a secure haven in instances of troubles, Bitcoin turned out to be a curse fairly than “digital gold.” 

To sum up, the research employed the outbreak of the pandemic as a quasi-experimental design to research the hedging talents of Bitcoin — which has been known as “digital gold” to focus on its famend talents to hedge threat funding for varied monetary asset lessons specifically shares. The research’s findings recommend that Bitcoin carried out poorly in hedging this extraordinary tail threat in U.S. shares. In contrast to earlier analysis, the findings recommend that Bitcoin is certainly uncovered to (extraordinary) tail dangers in different asset lessons resembling shares.

The views, ideas and opinions expressed listed here are the writer’s alone and don’t essentially replicate or symbolize the views and opinions of Cointelegraph.