Are Bitcoin and Ethereum safe-havens for stocks during the COVID-19 pandemic?

We utilize the COVID-19 pandemic announcement as the setting to test the safe-haven properties of Bitcoin and Ethereum.
Bitcoin and Ethereum exhibit short-term safe-haven properties.
Ethereum is potentially a better safe-haven than Bitcoin.
However, both cryptocurrencies exhibit high volatilities

1. Introduction

The Role of Bitcoin and Ethereum as Safe-Haven Assets During the COVID-19 Pandemic
The COVID-19 Pandemic and Its Global Impact

On March 11, 2020, the World Health Organization (WHO) officially declared COVID-19 a pandemic. According to a Chinese government report, the first case was recorded on December 8, 2019 (TheGuardian.com, 2020). As the pandemic's epicenter, China’s economic shocks impacted financial and non-financial firms in G7 countries (Akhtaruzzaman et al., 2020) and even brands like Corona beer (Corbet et al., 2020). The WHO announcement triggered significant financial market declines, with indices like the S&P500, FTSE-100, and Nikkei-225 plunging by 9.51%, 10.87%, and 4.41%, respectively. Even gold, typically a safe-haven asset, fell by 3.53% during this period (Baur & Lucey, 2010).

Safe-Haven Assets Before Cryptocurrencies

Before cryptocurrencies, safe-haven assets were defined as those uncorrelated with stocks during market crashes (Baur & Lucey, 2010). Historically, gold served this role during crises such as Black Monday (1987), the dot-com bubble (2001), and the global financial crisis (2008). Assets with low correlation to stocks provided diversification and hedging benefits during financial turmoil (Sandoval & Franca, 2012).

The Rise of Cryptocurrencies

Since Bitcoin’s inception in 2009, the cryptocurrency market has grown exponentially. Bitcoin’s value rose from nearly $0 in 2009 to over $7,000 in April 2020 (CoinMarketCap.com, 2020). Studies, such as those by Bouri et al. (2017), have debated Bitcoin’s potential as a hedge or safe-haven. An asset is considered a weak hedge if uncorrelated with another asset on average, and a strong hedge if negatively correlated. Similarly, safe-haven status applies during periods of market distress.

Can Bitcoin Be a Safe-Haven?

Bitcoin's suitability as a safe-haven is debated. Critics argue that Bitcoin’s high volatility, illiquidity, and transaction costs make it unsuitable (Smales, 2019; Chaim & Laurini, 2019). During the COVID-19 market downturn, Conlon and McGee (2020) found Bitcoin’s price closely correlated with the S&P500, amplifying contagion rather than acting as a safe-haven.
However, Dyhrberg (2016) suggests Bitcoin could serve as a hedging instrument, depending on market conditions and investment horizons. Bouri et al. (2020) even claim Bitcoin’s safe-haven properties rival those of gold.

Investigating Bitcoin and Ethereum During COVID-19

The COVID-19 pandemic marked the first global health crisis since Bitcoin’s creation. This study investigates whether Bitcoin and Ethereum, the second-largest cryptocurrency, acted as safe-havens during the pandemic. The US market, the largest globally and hardest hit by COVID-19, provides a meaningful context for analysis.

Key Findings

Our analysis reveals that both Bitcoin and Ethereum demonstrated short-term safe-haven properties during extreme market downturns. Ethereum, in particular, showed stronger safe-haven potential than Bitcoin. However, Ethereum also exhibited the highest daily return volatility, followed by Bitcoin, S&P500, and gold.

2. Data and methodology

We collect the Bitcoin (BTC) and Ethereum (ETH) data from coindesk.com, while the S&P500 and gold spot prices data from DataStream. To control Bitcoin halving's potential impact on May 12, 2020 (Crawley, 2020), we deliberately utilize a short-term observation window from July 1, 2019, until April 6, 2020.

Following previous studies (see, for example, Akhtaruzzaman et al., 2020; Bouri et al., 2017; Corbet et al., 2020), we utilize the DCC-GARCH methodology (Engle, 2002) to examine the dynamic correlation of cryptocurrency, gold, and S&P500. Bouri et al. (2017) suggest that a weak (strong) safe-haven asset is uncorrelated (negatively correlated) with another asset during times of stress.

We select the mean equation based on the information criteria¹ and find that the MA (1) process is the most suitable specification for our DCC-GARCH (1,1) model, as presented in Eq. (1).(1)

r_{t} = μ_{t} + ω ε_{t - 1} + ε_{t}

Whereas r_t is a vector of Bitcoin, Ethereum, gold, and S&P500 daily returns, μ_t is the conditional mean vector of r_t, and ε_t is the vector of residuals. Meanwhile, the variance equation follows:(2)

h_{t} = c + α ε_{t - 1}^{2} + b h_{t - 1}

Where h_t is the conditional variance, c is the constant, α is the parameter that captures the short-run persistence or the ARCH effect, and b represents the long-run volatility persistence or the GARCH effect.

The DCC-GARCH (1,1) equation is then given by Q_t, which is the square positive definitive matrix as in Eq. (3).(3)

Q_{t} = (1 - α - β) \bar{Q} + α ε_{t - 1} ε_{t - 1}^{'} + β Q_{t - 1}

Where Q_t is the time-varying unconditional correlation matrix of ε_t; ε_t is a vector of standardized residuals from the first-step estimation of the GARCH (1,1) process, and α and β are parameters quantifying the effects of previous shocks and previous DCCs on the current DCC. To investigate whether the correlations are dynamic, we perform the Wald test. The Wald test suggests that the correlations are indeed dynamic since α (at one percent) and β (at ten percent) are statistically different from zero. Also, the sum of α and β is less than unity.²

The DCC between assets i and j is then calculated as in Eq. (4):(4)

ρ_{i j, t} = \frac{q_{i j, t}}{(\sqrt{q_{i i, t}}) (\sqrt{q_{j j, t}})}

ρ_{i j, t} = \frac{q_{i j, t}}{(\sqrt{q_{i i, t}}) (\sqrt{q_{j j, t}})}

ρ_{i j, t} = \frac{q_{i j, t}}{(\sqrt{q_{i i, t}}) (\sqrt{q_{j j, t}})}

ρ_{i j, t} = \frac{q_{i j, t}}{(\sqrt{q_{i i, t}}) (\sqrt{q_{j j, t}})}

Following Aielli (2013), we also estimate the corrected-DCC (cDCC) and compare the outcomes with the DCC results as a robustness test.

After investigating the dynamic correlations, we also adopt the method of Baur et al. (2018) and run OLS regressions with Newey-West robust estimator, as presented in Eq. (5).(5)

\begin{matrix} C o i n_{t} = α + β_{0} G o l d_{t} + β_{1} C o v i d 19 * G o l d_{t} + β_{2} S t o c k_{t} + β_{3} C o v i d 19 * S t o c k_{t} + \\ λ_{0} C o i n_{t - 1} + λ_{1} G o l d_{t - 1} + λ_{2} S t o c k_{t - 1} + ε_{t} \end{matrix}

Where Coin_t is the cryptocurrency (Bitcoin or Ethereum) return at day-t, Gold_t is gold return at day-t, Stock_t is stock return at day-t, and Covid19 is a dummy variable that equals one if day-t is on the pandemic announcement date (March 11, 2020) or the subsequent days. If the cryptocurrency serves as a safe-haven in the pandemic, then the coefficient of β₁ is expected to be positive, while the coefficient of β₃ is negative (Baur et al., 2018).

3. Results and discussions

Based on Table 1, we learn that volatility inclines to increase during the pandemic. Before (during) the pandemic, the daily return standard deviations of Bitcoin, Ethereum, gold, and the S&P500 are 3.44% (9.11%), 4.34% (10.96%), 0.89% (2.19%), and 1.27% (6.07%), correspondingly. The increase in volatility is also visible from the return plot in Fig. 1. All returns throughout the pandemic are more volatile than before the pandemic.

Table 1

Empty Cell	Bitcoin	Ethereum	Gold	S&P500	Bitcoin	Ethereum	Gold	S&P500
Empty Cell	(A) Before COVID-19 pandemic (July 1, 2019-March 10, 2020)				(B) During COVID-19 pandemic (March 11, 2020-April 6, 2020)
Mean	−0.0027	−0.0023	0.0009	−0.00002	0.0062	−0.0052	0.0006	−0.0024
Median	−0.0041	−0.0032	0.0012	0.0009	0.0022	−0.0018	0.0025	−0.0151
Maximum	0.1276	0.1384	0.0308	0.0493	0.1747	0.2076	0.0370	0.0938
Minimum	−0.1321	−0.1623	−0.0348	−0.0759	−0.2709	−0.3453	−0.0353	−0.1198
Std. Dev.	0.0344	0.0434	0.0089	0.0127	0.0911	0.1096	0.0219	0.0607
Observations	174	174	174	174	19	19	19	19

Table 2 demonstrates that the pairwise correlations between gold and both coins tend to increase during the pandemic. Meanwhile, the correlations between the S&P500 and both coins turn negative. The correlation between S&P500 and Bitcoin (Ethereum) is −0.3790 (−0.3757). These are the initial signs that both cryptocurrencies are potential safe-havens for stocks. To inquire whether Bitcoin halving may affect this study's result, we compare Bitcoin and Ethereum returns. We learn that their correlation before (during) the pandemic is 0.8306 (0.9841). Since Ethereum does not face halving, the high correlation indicates that Bitcoin halving will not significantly impact this study's result.

Table 2

Empty Cell	(A) Before COVID-19 pandemic (July 1, 2019-March 10, 2020)				Empty Cell	(B) During COVID-19 pandemic (March 11, 2020-April 6, 2020)
Empty Cell	Bitcoin	Ethereum	Gold	S&P500	Empty Cell	Bitcoin	Ethereum	Gold	S&P500
Bitcoin	1.000				Bitcoin	1.000
Ethereum	0.8306	1.000			Ethereum	0.9841	1.000
Gold	0.0513	0.1224	1.000		Gold	0.1791	0.2345	1.000
S&P500	0.0729	0.0592	−0.3333	1.000	S&P500	−0.379	−0.3757	0.3705	1.000

3.1. Dynamic conditional correlation analysis

The S&P500 and gold dynamic correlations (Fig. 2(A)) before the pandemic are always negative between −0.3801 and −0.1479, with a median of −0.2909. During the pandemic, the correlations tend to be less negative, with a median of −0.1800. The S&P500 and Bitcoin dynamic correlations (Fig. 2(B)) before the pandemic are not always negative. The correlations vary between –0.0713 and 0.1007, with a median of −0.0047. However, they incline to become more negative during the pandemic, with a median of −0.0393. Hence, Bitcoin is a prospective safe-haven for stocks.

Before the pandemic, the S&P500 and Ethereum dynamic correlations (Fig. 2(C)) are often negative between −0.1259 and 0.1180, with a median of −0.0580. During the pandemic, the correlations still tend to be negative, with a median of −0.0499. Ethereum might be a better safe-haven than Bitcoin for three reasons. Firstly, for the whole period, the median correlation between Ethereum and S&P500 (−0.0570) is lower than the median correlation between Bitcoin and S&P500 (−0.0066). Secondly, different from Bitcoin and gold,³ Ethereum and gold dynamic correlations (Fig. 2(D)) are always positive even before the pandemic, with a median of 0.1382. The correlations tend to increase during the pandemic, with a median of 0.1754. Finally, during the pandemic, the Ethereum and gold median correlation (0.1754) is higher than Bitcoin and gold (0.1466).

As a robustness check, we also estimate the corrected-DCC (cDCC) (Aielli, 2013) and superimpose the dynamic correlations on the DCC plot (Fig. 3). Fig. 3 shows the alignment between cDCC and DCC results. Both Bitcoin and Ethereum exhibit safe-haven traits because their returns tend to correlate with S&P500 negatively. The entire period median correlation between S&P500 and Ethereum (Bitcoin) is −0.0545 (−0.0085). Comparable to DCC, Ethereum is potentially a better safe-haven than Bitcoin because of three reasons. First, the median correlation of Ethereum and S&P500 is more negative than Bitcoin and S&P500 (−0.0545 vs. −0.0085). Second, different from Bitcoin and gold,⁴ the dynamic correlations between Ethereum and gold are always positive, with a median before (during) the pandemic of 0.1364 (0.1818) (Fig. 3(D)). Third, in the pandemic, Ethereum and gold are more positively correlated, with a median of 0.1818 than Bitcoin and gold, with a median of 0.1552.

3.2. Regression analysis

We further investigate the safe-haven properties of Bitcoin and Ethereum during the COVID-19 pandemic by utilizing regressions as specified in Eq. (5). If a coin is a potential safe-haven, then the interaction between Covid19*Gold_t (β₁) should be positive while the interaction between Covid19*Stock_t (β₃) should be negative. In other words, during the pandemic, a safe-haven return should be positively associated with the gold return while negatively correlated with the stock return.

The results for Bitcoin are in Table 3(A). We use three different scenarios based on the number of days in the pandemic: 7, 10, and 14 days. Based on the results, we learn that Bitcoin displays safe-haven characteristics. In all three scenarios, Bitcoin return is positively associated with gold return and negatively interrelated with stock return. The Bitcoin findings are in line with Gil-Alana et al. (2020) and Stensås et al. (2019) but different from Conlon and McGee (2020) and Corbet et al. (2020), who profess that Bitcoin is an imperfect hedge during COVID-19 pandemic.

Table 3

Coin_t is cryptocurrency (Bitcoin or Ethereum) return at day-t. Goldt is gold return at day-t, Stockt is stock return at day-t, and Covid19 is a dummy variable equals to one if day-t is on the pandemic announcement date (March 11, 2020) or the subsequent days. If the cryptocurrency serves as a safe-haven, then β₁ (β₃) is expected to be positive (negative).

# of Days in COVID-19 pandemic	7 days	10 days	14 days	7 days	10 days	14 days
Empty Cell	(A) Bitcoin			(B) Ethereum
Variable	Coefficient	Coefficient	Coefficient	Coefficient	Coefficient	Coefficient
Constant	−0.0023	−0.0026	−0.0025	−0.0025	−0.0031	−0.0029
Gold_t	0.0597	0.0131	0.2132	0.3195	0.3575	0.5329
Covid19Gold_t*	2.6193***	1.7693***	1.0079**	3.6104***	2.041***	1.3699***
Stock_t	0.2042	0.0900	0.1812	0.2609	0.1618	0.2774
Covid19Stock_t*	−1.3198***	−0.7258***	−0.7588***	−1.5183***	−0.8617***	−0.9347***
Coin_t_-1(Bitcoin)	−0.0114	−0.0822	−0.0744
Coin_t_-1 (Ethereum)				0.0558	0.0014	0.0083
Gold_t_-1	0.8254**	0.8567***	0.9299***	0.4599	0.5374*	0.5949**
Stock_t_-1	0.2459***	0.4171***	0.4251***	0.4469***	0.6600***	0.6677***
Adjusted R-square	0.2697	0.2066	0.1889	0.2602	0.1893	0.1801
No. of Observations	193	193	193	193	193	193

We also find similar results for Ethereum, as presented in Table 3(B). For all 7, 10, and 14 days in the pandemic scenarios, we observe that Ethereum return correlates positively with the gold return but inversely correlated with stock return. Ethereum is plausibly a better safe-haven than Bitcoin since, in all scenarios, the β₁ and β₃ of Ethereum are consistently larger than Bitcoin. The Ethereum results are, to some extent, different from those of Bouri et al. (2020), who find that Ethereum is not a safe-haven for the US aggregate stocks.

We have also investigated FTSE-100 and find that Bitcoin and Ethereum coefficients are all as expected, but they are significant only for the 7-day settings.⁵ The overall regression results support the notion that Bitcoin and Ethereum exhibit safe-haven qualities for stocks. However, we are also cognizant that both coins exhibit daily return volatilities higher than gold and stocks (Table 1). To alleviate the volatility problems, Baur and Hoang (2020) advise adding a stablecoin such as Tether, which acts as a safe-haven for both coins. We have also added Tether to the regressions, and the results still hold, except for the 10-day scenario.⁶

4. Concluding remarks

Based on the WHO COVID-19 pandemic proclamation on March 11, 2020, we test the Bitcoin and Ethereum as safe-havens for stocks. Our dynamic correlations and regressions results show that Bitcoin and Ethereum, as the two major cryptocurrencies, display short-term safe-haven characteristics for stocks. Moreover, we learn that Ethereum might be a better safe-haven than Bitcoin during a short extreme stock market downturn, but Ethereum exhibits higher return volatility than Bitcoin. Our results are in line with Gil-Alana et al. (2020) and Stensås et al. (2019) but are different from Bouri et al. (2020), Conlon and McGee (2020) and Corbet et al. (2020). The difference may arise because we focus on the short-term safe-haven properties and use a relatively shorter observation window.

Although both cryptocurrencies exhibit safe-havens features, we realize that their volatilities are higher than gold and S&P500. Before (during) the pandemic daily return volatilities of Bitcoin, Ethereum, gold, and S&P500 are 3.44% (9.11%), 4.34% (10.96%), 0.89% (2.19%), and 1.27% (6.07%), respectively. We are mindful that incorporating coins into a portfolio may not be easy due to the high transaction cost and illiquidity (Smales, 2019). Nevertheless, we hope that with additional future regulations, the coins’ volatility could be lower. The regulations should increase market information availability and hinge on the fact that cryptocurrencies are different from the existing asset classes such as gold, commodities, or stocks (Gil-Alana et al., 2020; Yu et al., 2019). We also recognize that the coins' safe-haven characteristics are reliant on market conditions and investment horizons as described in prior studies (Bouri et al., 2017; Shahzad et al., 2020, 2019; Stensås et al., 2019).

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