When Bitcoin has the flu: on Bitcoin’s performance to hedge equity risk in the early wake of the COVID-19 outbreak

ABSTRACT

Using the coronavirus COVID-19 outbreak as a set-up for a quasi-experiment, this study derives novel insights on the dynamic correlation between Bitcoin and US stocks. Given the unprecedented scale of infections and the nature of the virus, the potential impact on the dynamic correlation was unpredictable and therefore uncertain. Using a difference-in-differences setting, the dynamic correlation between Bitcoin and stocks is controlled for the dynamic correlation between gold and stocks. This study finds that Bitcoin performed poorly in hedging this tail risk.

KEYWORDS:

• COVID-19
• coronavirus
• hedging
• financial technology
• Bitcoin

JEL CLASSIFICATION:

• G01
• G21
• G30
• G32

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ See https://www.theguardian.com/world/2020/mar/13/first-covid-19-case-happened-in-november-china-government-records-show-report.

² As the virus could have emerged even earlier, skipping the 17 days period between 31 October 2019 and 17 November 2019 controls for any potential microstructure issues.

³ The realized dynamic correlations for $corr{\left(gold,s\text{amp}p500\right)}_t$ and $corr{\left(btc,s\text{amp}p500\right)}_t$ vary between −0.0059 and −0.2626, and between 0.6196 and 0.6587 in the 12 March 2020 to 18 March 2020 period.

⁴ The estimated difference of 0.6275 corresponds in both realized dynamic correlation distributions, that is, $corr{\left(btc,s\text{amp}p500\right)}_t$ or $corr{\left(gold,s\text{amp}p500\right)}_t$ to less than 0.5% of the probability mass. Note that Rehse et al. (2019), who explore the effects of the hurricane Sandy on market liquidity, also employ a difference-in-differences setting using the outbreak of the hurricane as quasi-experimental design.