A topic that comes up occasionally when talking with clients is Bitcoin.
The cryptocurrency gained plenty of notoriety in 2017 when its value skyrocketed. Unfortunately, some people were suckered into the craze and lost money when the Bitcoin price came back down to earth.
With the volatility in the stock market in 2020 and plenty of uncertainty as the world deals with a pandemic, there has been discussion about using Bitcoin as a safe haven or hedging asset.
When we pull up the charts, however, Bitcoin has proven to be unsuccessful at helping the portfolio during downturns.
The Bitcoin chart over the last year show a big dip in March, when the stock market plummeted. In more recent activity, Bitcoin tumbled in early September when the markets hit a bump in the road.
This chart shows the S&P 500 over the last year. If Bitcoin were a true hedge, we should have seen stronger movement from cryptocurrency when the S&P 500 fell.
The price of Bitcoin and the S&P 500 have moved on a similar path for most of the year.
If Bitcoin does not protect the portfolio during tough times, what can we turn to that does provide some stability?
The old reliable is government bonds, specifically U.S. Treasuries.
The chart above is of the ETF TLT which holds long term U.S. Treasury bonds. While it did experience a very brief dip in mid-March, overall it has held its value during a volatile 2020.
The bond fund also provides interest payments that help to boost the portfolio. The yield right now is about 1.75% which is nothing to brag about, but it is 1.75% more than what Bitcoin provides.
The other asset investors turn to when they want to protect their portfolio is gold. This asset is the king of the safe haven group.
The chart above is of the ETF GLD which holds gold. It did experience that mid-March dip, but overall, it held its value fairly well during a tough stretch.
Bitcoin could still emerge as a hedge or safe haven for stock market volatility. U.S. markets had an incredible bull run for nearly all of Bitcoin's life, so we do not have a lot of data on the relationship between the cryptocurrency and the S&P 500.
However, with what we have seen so far, Bitcoin adds little protection or stability to the portfolio during market volatility.
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