Bitcoin’s Hedging Performance in the Wake of the Coronavirus Outbreak

The recent coronavirus outbreak has far-reaching consequences beyond the spread of the disease and efforts to quarantine it. Recently, we’ve experienced one of the most severe stock market crashes in modern times: On March 9, 2020, the Dow Jones Industrial Average recorded a drop of -7.8%, which happened to be its worst single-day loss ever.

However, on Thursday, March 12, 2020, the Dow then recorded the fifth-largest drop in modern history based on percentage points by a staggering amount of almost 10%. Unfortunately, the losses did not stop there. Four days later, on March 16, the Dow hit a new record of almost 13%. Since the COVID-19 outbreak became an international issue, it is unsurprising that equity markets worldwide have experienced severe losses. In acknowledging the ability of Bitcoin (BTC) to hedge stock market risk, some economists and researchers refer to Bitcoin as “digital gold.” Some studies argue that Bitcoin is exposed to tail-risk only within the crypto markets, but it is not exposed to tail-risk with respect to other asset markets, such as equity markets or gold. However, the recent COVID-19 outbreak is a tail-risk event — or what Nassim Taleb refers to as a so-called “Black Swan” because it is an outlier — and it carries an extreme and consequential impact. Read More...

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