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Can Cryptocurrency Hedge Against A Stock Market Crash?


Can Cryptocurrency Hedge Against A Stock Market Crash?

Market crashes can happen at any moment, and many are wondering what are the best ways to avoid financial ruin when the next crash comes. Enter cryptocurrencies.

Like stocks, cryptocurrencies can be traded. In fact, there are several extremely reputable exchanges around the world, like eToro, where investors of all skill and knowledge levels can start and grow their crypto portfolio with ease.  And since cryptocurrencies are extremely liquid, traders can buy and sell and move from one currency to another quickly and safely with just a few clicks.

Check out eToro here>>

Yet, many traders still see cryptocurrencies as volatile. This is partially due to the fact there are so many competing digital currencies. However, Volatility isn’t necessarily a bad thing. Compared to the stock market, are cryptocurrencies really that volatile? 

If you think cryptocurrencies are volatile, look at what happened to the stock market in March, 2020. Despite the massive March drop, by August of the same year, the stock market had already reached a new high, despite the continued global pandemic. The value in pointing this out is that it simply shows that volatility may be a factor in any currency. And perhaps this reality can help us develop strategies to weather the storms when they arrive.

In this article, we partner with eToro and try to answer each of these questions. eToro is a great platform to get started investing in cryptocurrencies. Check out eToro here >>

The Coming Stock Market Crash

The truth is, there is always a crash on the horizon. Timing it is the difficult part about crashes. With so much liquidity pumped into the market by the FED since March, many people believe any dips in the market will be quickly bought up. This scenario makes a crash unlikely.

But crashes are part of any market. Maybe the FED is able to prop up the market but if people lose confidence, there may not be anything the FED can do to stop a crash.

There are a number of issues that can lead to a stock market crash this year. They include:

  • Lack of agreement on additional fiscal stimulus
  • The presidential election
  • A draw out election contest
  • Jobs numbers turn down
  • Earnings reports turn down
  • Continued coronavirus-related shutdowns

The above list is certainly not exhaustive but those are the major issues that have the potential to lead to a crash this year.

What Assets Might Prevail?

If in fact there is an economic crash in our near future, and the stock market takes a dramatic downturn, which assets will prevail as a hedge to the chaos?

The easy answer is the ones that are uncorrelated with the stock market. These uncorrelated assets will go down less, not at all, or may even go up as the stock market goes down. Knowing which assets these may be before the crash requires lots of historical research to find correlations. You’ll also need to keep a finger on the macroeconomic pulse.

The problem with correlations is that they often change. During a crash, most assets tend to correlate towards one. Meaning, all assets go down. It’s as if there isn’t a safe place to hide during a crash. You can, of course, always put your money in cash during a crash but that requires being able to predict the future.

Let’s see how Bitcoin, the world’s most popular cryptocurrency has done during previous stock market crashes.

Cryptocurrency Is A Popular Choice

Bitcoin’s correlation with the S&P 500 and gold has been changing over time. It’s gone from -15% to +30%. In the graph below from MarketWatch, it shows the correlation in August 2019 at 15%. SPY is the S&P 500 ETF.

Can Cryptocurrency Hedge Against A Stock Market Crash

Source:  https://www.marketwatch.com/story/heres-what-bitcoins-relationship-with-the-stock-market-and-gold-looks-like-over-the-past-90-days-2019-08-21)

As you can see, Bitcoin’s correlation to the S&P 500 and gold is always fluctuating. To get a better idea of how Bitcoin has performed in crashes, let’s look at a few.

From August 2018 to mid-December 2018, the S&P 500 dropped by 60%. During the same period, Bitcoin dropped by 7.5%, as shown in the image below.

BTC Chart

Source: Yahoo Finance

Certainly, being in Bitcoin during this period would have seen less account drawdown. What about the 2020 crash? Bitcoin crashed along with the market but came out of it quicker than the S&P 500. It also surpassed its February high in July.

So what does this all mean? Can cryptocurrency hedge against the stock market? 

Sometimes. Because of its volatility and the fact that nothing backs it, Bitcoin is not a safe haven. However, the volatility in Bitcoin is amplified compared to the stock market. The crashes are bigger but the sprints higher out of a crash are also bigger. And periodically, you don’t experience as much of a crash as the stock market. Of course, the problem is that it’s hard to know ahead of time what Bitcoin will do compared to the S&P 500. 

How You Can Invest Your Assets In Crypto With eToro

Not sure how to get started investing in cryptocurrencies? eToro is a dynamic and safe trading platform that is trusted by millions around the world.

There, you can easily choose from a  wide variety of top cryptocurrencies, level-up your knowledge, and copy the moves of leading traders.You can also trade on iOS or Android mobile devices. 

Check out eToro here >>

eToro USA LLC; Investments are subject to market risk, including the possible loss of principal.

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