Bitwise: More than gold, BTC is an excellent long-term hedge.

Author: Juan Leon, Senior Investment Strategist at Bitwise

Compiled by Luffy and Foresight News.

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

Unfortunately, Bitcoin also could not escape, experiencing a big dump of 14.52% from August 2nd to August 5th. The significant pullback has raised a lot of questions in the media: Why did Bitcoin, as a hedging tool, fail? Is Bitcoin really a hedging asset?

Out of curiosity, I decided to delve into historical data. I analyzed the reactions of BTC and gold when the S&P 500 index fell more than 2% in a single day over the past decade. Then, based on the performance of each asset on the day the S&P 500 index fell, their returns were divided into three categories:

• Perfect Hedging: The asset has achieved positive returns;
• Partial Hedging: The asset generates negative returns, but outperforms the S&P 500 index;
• No Hedging: The return on this asset is worse than the S&P 500 index.

I have discovered some more inspiring conclusions than usual in the report.

Is BTC a short-term hedging tool? No, it is not.

First, let’s talk about the bad news: data shows that BTC is an unreliable short-term Hedging tool. In fact, its daily return seems to have nothing to do with the stock market trend.

In more than half of the time (59% to be exact), it acts as a Hedging tool, on days when the S&P 500 index falls sharply, it either pumps significantly or falls less than stocks. But in the other 41% of the time, its decline exceeds the index.

Unfortunately, when stocks fall by 2% and BTC performs poorly, the drop in BTC is very exaggerated, averaging a 7.80% decline.

This tells me that not all single-day pullbacks are the same. Of course, the reasons for a 2% drop in stocks on a given day are different. Data shows that some reasons lead to a significant pump in BTC, while others lead to a significant pullback in BTC.

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

BTC’s performance as a Hedging asset. Data source: Bitwise Asset Management, Bloomberg, data range from January 1, 2014 to August 9, 2024.

The performance of gold as a Hedging asset. Data source: Bitwise Asset Management, Bloomberg. The data time range is from January 1, 2014 to August 9, 2024.

Gold has performed better. In 54% of the days when the S&P 500 index plummeted significantly, gold achieved positive returns. However, on average, gold only saw a pump of 1.05% during this period. This makes gold a challenging short-term hedging tool: you must hold a large amount of gold to have a real impact on your overall investment portfolio. If 5% of your portfolio is in gold, then a 1% pump does not have much effect on mitigating the pullback of 60% stock Position in the portfolio. In the remaining 46% of the time, gold averaged a pullback of 0.99%.

Fortunately, most of our investments are not short-term, but long-term. Therefore, I want to know how these two assets perform as long-term Hedging tools?

Is BTC a long-term hedging tool? Absolutely.

The performance of these two assets tells completely different stories. After a pullback of more than 2% in the stock market on a certain day, the average return of gold is 7.88%, far behind the Rebound of the stock market. In contrast, BTC’s average return rate is as high as 189.68%.

The average return after a significant drop in the S&P 500 index for one year. Source: Bitwise Asset Management, Bloomberg. Data is from January 1, 2014 to August 9, 2024.

Why is this happening? Gold is a reliable asset, and many people instinctively buy gold in times of short-term panic. However, the mature state of the gold market means that its performance over the longer term is unlikely to be outstanding. BTC has a limited supply and decreasing issuance, which makes it a strong store of value, but it is still in the early stages of adoption. Therefore, it still has the characteristics of a risky asset. This means that it will have a greater reaction to market pullbacks, and the longer the observation period, the better the return.

The market performance of the past decade clearly shows that buying BTC when the market declines can bring returns.

Will BTC win again?

The most common criticism of the above analysis is that past performance does not guarantee future results. Although this time may be different, I believe the prospects for BTC in the next 12 months are very optimistic.

Consider the following potential catalysts:

SpotBTC ETP fund inflow: Since January, the fund inflow of BTC ETP has exceeded 170 billion US dollars, surpassing the new supply, driving BTC to hit a historical high earlier this year. These inflows do not even include some of the largest participants. Last week, Morgan Stanley became the first major securities firm to allow the launch of BTC ETP on its platform. We expect Merrill Lynch, UBS, Wells Fargo, and other institutions to follow suit.

Regulatory Environment Improvement: This year, the bipartisan alliance in Congress has pushed for the passage of three cryptocurrency bills in the House of Representatives. With the Republican Party including cryptocurrency in its 2024 official platform and the Harris campaign team reassessing its stance, the encryption industry is about to see regulatory clarity.

Fed Rate Cut: Central Banks in Europe, the UK, and other Central Banks have already started cutting interest rates. With slowing US inflation and economic data raising concerns of a recession, the Fed must catch up. Federal Funds futures are already anticipating a rate cut at the September meeting.

Have we emerged from the woods yet? Maybe not. Investors remain concerned about market fluctuations caused by Japanese yen Arbitrage trading Close Position. Coupled with uncertainty surrounding the US presidential election, signs of global economic slowdown, and the threat of conflict between Iran and Israel, there will be more turbulence to come. But the next time the stock market takes a dive, you’ll know which asset is the best long-term Hedging tool.