Bitcoin is not a hedge for anything because its volatility actually adds risk to every single scenario a portfolio manager can create. | Source: Shutterstock
Today I’m going to debunk the claim that bitcoin is a hedge against anything, much less the stock market.
What Is a Hedge? It Sure Ain’t Bitcoin!
A “hedge” is an investment made to offset some form of risk. It can take many forms.
An investor may purchase put options on the stock market that will increase in value if the stock market falls. Perhaps a company will open a factory overseas that it exports products to in order to hedge against currency risk.
So the key to a hedge is that it, as an investment, offsets risk in another investment.
Risk is measured by volatility. The higher the volatility of a security, the riskier it is.
How to Measure Risk
Volatility is measured by standard deviation.
To provide a baseline, the five-year standard deviation for the S&P 500 is 12. That means the S&P has a 95% likelihood of moving in a range of -24% to +24% in any given year.
Now let’s look at one of most volatile securities there is in the securities markets: crude oil. The five-year standard deviation for the United States Oil Fund ETF is 28.
Bitcoin is more volatile and riskier than this, but it gets worse.
Now let’s look at a 3x leveraged oil fund ETF, one designed to provide triple the returns of crude oil.