Is bitcoin a safe haven? A correlation analysis and some other thoughts

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Coinmonks

6 min readFeb 16, 2022

Bitcoin is supposed to have many different attributes. In this article, we will focus on bitcoin as a safe haven.

According to Baur and Lucey, a safe haven is “an asset that is uncorrelated or negatively correlated with another asset or portfolio in times of market stress or turmoil”. Therefore, it is a type of asset that is expected to retain, or even increase its value during bear markets. As an example, gold is commonly considered to be a safe haven.

Regarding bitcoin, the decentralized nature of cryptocurrencies makes them independent from monetary policy. This has led some investors to think that bitcoin is not related to the general rhythm of the economy. In other words, to view bitcoin as a potential safe haven.

To contrast this hypothesis, we are going to study the correlation between bitcoin, the VIX, and the S&P 500. The correlation coefficient measures the strength and direction of the relationship between two variables. Its value ranges between -1 and 1, where -1 means perfect negative correlation and 1 implies perfect positive correlation. Consequently, bitcoin should be negatively correlated with the S&P 500 index to consider this asset a safe haven. This would imply that whenever the S&P 500 decreases, bitcoin raises its valuation. The closer the number to -1, the stronger the correlation.

In relation to the VIX, it is the so-called Wall Street’s fear index. As the VIX is calculated using the prices of S&P 500 index options, it is commonly used to project volatility for the coming 30 days. Therefore, it echoes investor sentiment. For instance, an increase in VIX value would mean a rising concern of investors about the future of financial markets. As a consequence, the S&P 500 is supposed to decline.

Disclaimer

It is important to realize that correlation does not imply causation. This means that, from the correlation between two variables, you cannot infer a cause-and-effect relationship. The fact that the S&P 500 and the VIX are positively correlated does not mean necessarily that changes in the S&P 500 are caused by variations in the VIX, and vice versa.

On the other hand, note that, most certainly, an experienced statistician would tell you that the correlation coefficient is not the most accurate statistical tool to use in this case. Yet, it is probably the most convenient one. There are more suitable tools for analyzing the strength of the relationship, but they are also harder to use. So, to get a general overview of the problem, the correlation coefficient should be good enough.

Keep also in mind that this analysis is restricted to determining whether bitcoin may be considered a safe haven or not. It does not intend to predict future valuations or to study the technology that is behind bitcoin.

A glimpse into the graphics

Let’s start to analyze the correlation between bitcoin and VIX with the following chart:

As you may see, both variables seem to be negatively correlated. In general terms, if VIX goes up, the bitcoin price decreases. And the other way around: when bitcoin is bullish, the VIX index goes down. You may also notice that there are certain periods when this rule seems to be especially accurate. This is during the 2020 stock market crash in March and this last January 2022.

All this gives us a general impression, but it does not go beyond intuition, which could be wrong. Neither do we know the intensity of this relationship. Yes, both variables seem to be negatively correlated. However, to determine the strength of the relationship, we need to calculate the correlation coefficient of this period.

Doing the math

The table available above is a correlation matrix and displays the correlation coefficients for bitcoin, the VIX, and the S&P 500. The data set used to calculate the coefficients is the weekly change of value between 22/09/2014 and 24/01/2022. Here are some conclusions:

First of all, we can affirm that there is a negative correlation between bitcoin and the VIX index. However, this relationship is weak. Remember that the correlation coefficient ranges between -1 and 1. In this case, even though the number is negative, it is closer to 0. Just have a look at the correlation coefficient between the S&P and the VIX: with a -0.74, they have a much stronger correlation.
In general terms, bitcoin seems to behave similarly to the S&P 500. Although the correlation relationship is weaker, bitcoin turns out to be negatively correlated with the VIX, just like the S&P 500. You can look over the correlation coefficient between bitcoin and the S&P 500 to find out that they are positively correlated. Yet this relationship is, once again, weak.

We have seen that there is some resemblance in the way bitcoin and the S&P 500 fluctuate. So, for the moment, bitcoin is far from being considered a safe haven. However, this cannot be considered as a conclusive statement: the relationship is weaker than expected.

In the graphic, we show that the negative correlation between bitcoin and the VIX index seemed to be stronger during two specific moments: the pandemic crash and the bearish market of January 2022. So, let’s have a look at the correlation during these periods to see if we can have more solid conclusions.

Our intuition was well-founded! With -0.59 and -0.77 we can now affirm that, during these two periods, bitcoin had a strong negative correlation with the VIX index. In the first period, the 2020 stock market crash, this relationship was even stronger than the one between the S&P 500 and the VIX. It’s also worth mentioning that bitcoin and the S&P 500 also had a strong relationship, especially during the second period.

Final thoughts

This analysis drives us to the conclusion that bitcoin, in the last years, has not behaved like a safe haven. Especially during periods of market stress — which are, in fact, the most relevant moments to classify an asset as a safe haven.

However, another consideration is noteworthy. The indexes used to compare with bitcoin are both indexes related to the US. Nevertheless, I bet that the results would be pretty similar if we take as comparison other indexes from Europe or Japan. The periods when the correlation was stronger were global events, moments of global crisis. This makes me think that bitcoin, as a global currency, is linked to the global economy, not with local or national economies.

The international feature makes sense with the nature of bitcoin: it is a cryptocurrency, a digital asset, available to everyone in the world with no restrictions. As a result, bitcoin is affected by global changes, but not by national affairs, as long as they keep being national and they do not become a global concern. Therefore, even though we concluded that bitcoin did not behave like a safe haven for the US, it would be interesting to study if this statement may change in countries involved in more conflicts or with weaker local currencies.

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Some other resources about the topic:

Why Cryptocurrencies Will Never Be Safe Havens. Mark Spitznagel.
Bitcoin, Currencies, and Fragility. Nassim Nicholas Taleb.

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