On August 5th, global stock markets plunged into panic, with the Nikkei index in Japan falling by 12%, the largest single-day decline since 1987, and the S&P 500 index closing down 3%.

Unfortunately, the performance of Bitcoin (BTC) was not good either, with a big dump of 14.52% between August 2nd and August 5th. The significant pullback has raised a lot of questions in the media: Why did BTC fail as a hedging tool? Is BTC really a hedging asset?

Out of curiosity, I decided to delve into historical data.

Specifically, I analyzed the reactions of BTC and gold to daily declines of 2% or more in the S&P 500 index over the past decade.

Then, based on the performance of each asset on the day when the S&P 500 index fell, I categorized their returns into three groups:

Perfect Hedging - This asset provides positive returns

Partial Hedging - The asset generates negative returns but outperforms the S&P 500 index.

No Hedging - the return of this asset is worse than the S&P 500 index.

I find the content I discovered more inspiring and subtle than the content usually reported.

Is BTC a short-term hedging tool? Not really.
First, let's talk about the bad news for Bitcoin (BTC): Data shows that BTC is an unreliable short-term Hedging tool. In fact, its daily return seems to have little to do with the stock market trend.

In more than half of the time (59% to be precise), it serves as a Hedging tool, pumping heavily on days when the S&P 500 index drops significantly, or falling less than stocks. But in the other 41% of the time, its decline exceeds the index.

Unfortunately, when this happens, the situation often turns for the worse: when stocks drop 2% or more and BTC performs poorly, it really falls, averaging a 7.80% decline.

This tells me that not all single-day pullbacks are the same. Of course, the reasons why stocks fell 2% on a certain day are not the same. The data shows that some of these reasons lead to a significant pump of BTC, while others lead to a significant pullback of BTC; there is no hard rule.

If you are looking for a foolproof intraday hedging method to combat a significant pullback in the stock market, BTC is not a good choice.

BTC