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Has Bitcoin Improved As A Flight To Safety Investment?

Bitcoin (CRYPTO: BTC) bulls have had a great run in the past couple of years, and many argue that the popular cryptocurrency has replaced gold as the best way to protect your portfolio from downside in the stock market.

There are plenty of reasons for investors to be seeking a safe haven for their cash these days given stocks are at all-time highs while interest rates remain historically low. Diversification is the most powerful tool for any investor to help reduce risk in a portfolio. To maximize diversification, investors need to identify market sectors and assets that have minimal correlation to each other.

When you have a portfolio of assets that are highly correlated, a market sell-off will likely drag down your entire portfolio all at once. However, if your assets have a low or even negative correlation, a stock market sell-off or a drop in one single market sector, such as the tech sector or energy sector, might not tank your entire portfolio.

See Also: Is Bitcoin a good investment in 2021?

Traditional asset classes include things like cash, stocks, bonds, real estate and commodities. Common commodities that have traditionally been considered flight-to-safety investments include gold, silver and oil. The easiest way for investors to gain exposure to many of these asset classes is by buying exchange-traded funds, such as the following ETFs:

  • SPDR S&P 500 ETF Trust (NYSE:SPY) for stocks.
  • SPDR Gold Trust (NYSE:GLD) for gold.
  • United States Oil ETF (NYSE:USO) for oil.
  • iShares 20 Plus Year Treasury Bond ETF (NYSE:TLT) for treasury bonds.
  • Barclays iPath Series B S&P 500 VIX Short-Term Futures ETN (BATS:VXX) for market volatility.

Cryptocurrency is a relatively new asset class that some investors see as a superior way to diversify a portfolio. The most popular Bitcoin fund today is the Grayscale Bitcoin Trust (OTC:GBTC).

Correlations: Here’s a look at the Portfolio Visualizer daily return correlation matrix for the SPY, the GBTC, the GLD, the USO, the TLT and the VXX funds.

The correlations are calculated based on daily returns since January 2018.

The good news is that the numbers suggest that the GBTC bitcoin fund does have a relatively low 0.23 correlation with the SPY ETF. In fact, the GBTC ETF has even less of a correlation to stocks than the USO ETF, which has a 0.39 correlation.

Those arguing for bitcoin being its own asset class would point to the fact that the GBTC has very low correlation to stocks, gold, oil, treasury bonds or even market volatility, according to the table.

Unfortunately, the correlation between bitcoin and the SPY is much higher than the correlation between gold and the SPY. In other words, bitcoin prices tend to drop much more than gold prices drop when the stock market sells off.

The VXX volatility fund has the highest negative correlation to the SPY, but it comes with its own set of problems. Over the last five years, the VXX fund is down 77.2% overall thanks in large part to value lost via contango.

The TLT, on the other hand, has a negative 0.39 correlation to the SPY and it has generated a positive 18.7% total return over the last five years. That return is not great, but its track record suggests the TLT is a much better flight-to-safety investment and hedge against stock market downside than Bitcoin at this point.

Benzinga’s Take: The fact that Bitcoin prices crashed even harder than stock prices in March 2020 is all the evidence investors need to know cryptocurrencies aren’t a safe place to have your money during a stock market crash. In fact, the positive correlation between the GBTC fund and the SPY fund has actually increased from 0.12 to 0.23 since March 2020.

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