Is Bitcoin a Short-Term Hedge? Not really
First, the bad news: The data shows that Bitcoin is an unreliable short-term hedge. In fact, its daily returns seem to have nothing to do with stock market movements.
More than half of the time (59% to be exact), it acted as a hedge, either rising significantly or falling less than stocks on days when the S&P 500 fell sharply. But the other 41% of the time, it fell more than the index.
Unfortunately, when stocks fell 2% and Bitcoin underperformed, Bitcoin's decline was quite dramatic, falling 7.80% on average.
This tells me that not all single-day pullbacks are the same. Of course, there are different reasons why stocks fall 2% on a given day. The data suggests that some of those reasons cause Bitcoin to rise sharply and others cause Bitcoin to fall sharply.
If you're looking for a foolproof hedge against a sharp stock market pullback, Bitcoin is not a good choice.
Gold has performed better. Gold posted positive returns on 54% of the days when the S&P 500 fell sharply, but on average, it rose just 1.05% during that period. This makes gold challenging to use as an effective short-term hedge: you have to own a lot of it to have a real impact on your overall portfolio. If 5% of your portfolio is in gold, that 1% gain will do little to cushion a correction in the 60% of your portfolio in stocks. The other 46% of the time, gold fell an average of 0.99%.
Fortunately, most of us invest not for the short term, but for the long term.
