Recently, the Federal Reserve Bank of Kansas City, which is one of 12 regional Reserve Banks that, along with the Washington, DC-based Board of Governors, makes up the central bank of the U.S., looked at the behavior of U.S. government bonds, gold, and Bitcoin from January 1995 through February 2020, and commented on the correlation of Bitcoin with the S&P 500 during this period.

As it has become increasingly clear to the crypto community, during the COVID-19 pandemic, Bitcoin has mostly behaved as a “risk-on” asset rather a “risk-off” (or “safe haven”) asset, and in particular various prominent crypto analysts have noticed that Bitcoin has been showing somewhat of a positive correlation with the S&P 500:

This observation has shocked and disappointed those holders of Bitcoin who had expected a time of turmoil that has the world’s central banks ready for virtually unlimited money printing to be the perfect setup for Bitcoin.

However, some investors have not been surprised by Bitcoin’s behavior during this crisis since in traditional financial markets it is not uncommon during a time of crisis to see all correlations go to 1.

Anyway, it is against this backdrop that we take a look at the research done by the Kansas City Fed (aka “KC Fed”), which was published on April 15 as a research paper titled “Safe-Haven Performance in the Age of Bitcoin”.

The KC Fed paper started by defining what a safe haven asset is:

“An asset is considered a safe haven if it is uncorrelated or negatively correlated with riskier assets during times of stress.”

The “quintessential” example is U.S. government securities.

It then pointed out that “in recent years, investors have questioned whether Bitcoin might function as a safe haven as well.” 

The KC Fed researchers decided to measure “how the 10-year Treasury note and gold behaved in periods of stress before and after the introduction of Bitcoin” by looking at “the correlations of their daily returns with the daily returns of the S&P 500” between January 1995 and February 2020. They also separately analyzed “correlations in March 2020, when the bull market ended amid concerns about the coronavirus pandemic.”

Here is what they found:

“Both the 10-year Treasury and gold have negative, statistically significant correlations with the S&P 500, suggesting both assets have the properties of safe havens. In contrast, Bitcoin has a weak positive correlation with the S&P 500 during periods of financial stress, suggesting Bitcoin behaves more like a risk asset than a safe haven.”

Then, they divided the full sample into periods with and without “financial stress” and here is what they found:

“…the 10-year Treasury consistently behaves like a safe haven: the correlations for the 10-year Treasury are negative and statistically significant across all stress periods… In contrast, gold has only behaved like a safe haven in certain periods of financial stress… Bitcoin has failed to exhibit the behaviors of a safe-haven asset—its correlations with the S&P 500 are not statistically significant in any period and positive in all but one.”

They also wanted to know whether the financial stress caused by the COVID-19 pandemic had “altered these correlations,” and they discovered that:

“… during March 2020, none of the assets exhibited statistically significant safe-haven behavior.

“The result for the 10-year Treasury is somewhat surprising, as it was a safe haven for every stress period from 1995 through February 2020, regardless of duration. Although its correlation with the S&P 500 in March 2020 is still negative, it is not statistically significant. 

“Gold has a positive but insignificant correlation, which is unsurprising given that it has not consistently demonstrated safe-haven properties across stress periods.

“As in the full sample, Bitcoin has a positive, statistically significant correlation, suggesting it performed like a risk asset in March rather than a safe haven.”

Therefore, they made the following conclusion:

“Overall, our results suggest that the 10-year Treasury has generally exhibited safe-haven behavior, gold has occasionally exhibited safe-haven behavior, and Bitcoin has never exhibited safe-haven behavior since its introduction.”

Last Thursday (April 16), Charles Hayter, Co-Founder and CEO of CryptoCompare, one of the leading independent crypto market data providers, also commented on Bitcoin’s “store of value” use case:

“Its risk-off across the markets — Bitcoin is still novel, and is great as a means of transferring value quickly, person to person, but bad at holding value. The theory is that, with time, this will change but quite clearly it has nascent fragmented markets at present and isn’t fulfilling the digital gold story.”

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