The Correlation Between the Stock Market and Bitcoin During COVID-19 and Uncertainty Periods

Abstract

This study investigates the influence of the stock market on Bitcoin during COVID-19 and other high-uncertainty periods. Using quantile regression, we found that S&P 500 returns significantly impacted Bitcoin returns during turbulent times, such as the pandemic. Additionally, the VAR(1)–GARCH(1,1) model revealed a volatility spillover effect from stocks to Bitcoin, highlighting heightened interconnectedness during crises.

Keywords: Bitcoin, Stock Market, COVID-19, Volatility, Safe-Haven Assets, Cryptocurrency, Financial Uncertainty

Introduction

Cryptocurrencies like Bitcoin have gained traction as high-risk, high-reward investments, prompting research into their role in portfolio diversification and hedging. While some studies suggest Bitcoin hedges against S&P 500 downturns (Bouri et al., 2017), COVID-19 disrupted this dynamic, raising questions about Bitcoin’s reliability during crises. This paper explores how stock market fluctuations affect Bitcoin during periods of uncertainty.

Methodology:

• Quantile Regression: Assessed Bitcoin returns across low/medium/high uncertainty.
• VAR(1)–GARCH(1,1): Measured volatility spillover from stocks to Bitcoin.

Data and Methodology

Data

• Scope: Weekly Bitcoin and S&P 500 prices (2016–2021).
• Sources: CoinGecko (Bitcoin), Economic Policy Uncertainty Index.

Methods

1. Quantile Regression:

   • Model: RBTCₜ = f(RSPₜ₋₁, Uncertainty).
   • Grouped by uncertainty level (low/medium/high).

2. Volatility Analysis:

   • VAR(1)–GARCH(1,1) model tracked conditional variances:
     hBTCₜ = α + β(eBTCₜ₋₁)² + γ(hBTCₜ₋₁) + δ(eSPₜ₋₁)².

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Key Findings

1. Returns Correlation:

   • S&P 500 returns influenced Bitcoin only during high uncertainty (0.698% impact, p < 0.01).
   • Stronger effect during COVID-19 (0.774%).

2. Volatility Spillover:

   • Shocks from S&P 500 significantly increased Bitcoin’s volatility (β = 0.00137, p < 0.05).
   • No reverse spillover (Bitcoin to stocks).

3. Uncertainty Matters:

   • COVID-19 acted as a catalyst, amplifying market linkages.

Conclusion

Bitcoin and the stock market exhibit stronger correlations during crises, challenging Bitcoin’s role as a traditional safe haven. Investors should monitor uncertainty indicators to optimize portfolios.

FAQs

Q: Does Bitcoin hedge against stock market crashes?
A: Only selectively—during extreme uncertainty (e.g., COVID-19), Bitcoin’s returns correlated with stocks.

Q: How does COVID-19 affect Bitcoin’s volatility?
A: Pandemic-induced uncertainty amplified volatility spillovers from stocks to Bitcoin.

Q: Should I include Bitcoin in a crisis portfolio?
A: Caution advised—while diversification benefits exist, Bitcoin’s tie to stocks rises during turmoil.

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References

1. Bouri, E., et al. (2017). Finance Research Letters.
2. Baker, S., et al. (2016). Economic Policy Uncertainty Index.

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