Introduction
Financial markets play a pivotal role in national and global economic development by bridging capital providers with capital seekers. They enable businesses to raise funds for expansion, employment, and innovation—driving growth and prosperity. However, market volatility remains a central concern for investors, particularly during periods of global uncertainty. Mitigating financial risk and preserving capital are top priorities for traders navigating turbulent economic environments.
The outbreak of the COVID-19 pandemic in 2020 triggered unprecedented disruptions across global economies. Stock markets plunged as uncertainty soared, prompting investors to flee from risky assets and seek refuge in traditional safe-haven instruments. Among these, gold has long been valued for its stability and ability to hedge against inflation and market downturns. During the pandemic, gold maintained its appeal, delivering strong performance as investors sought stability.
Simultaneously, a new contender emerged: Bitcoin (BTC). As the leading cryptocurrency, Bitcoin has demonstrated remarkable growth and resilience. With a market capitalization exceeding $851 billion by late 2023—representing over 51% of the total crypto market—Bitcoin has become a major asset class. Its price surged from approximately $525 billion in December 2022 to over $851 billion by December 2023, reflecting a growth rate of nearly 161%. Additionally, Bitcoin exhibits an average cross-correlation of 52% with other cryptocurrencies, reinforcing its central role in the digital asset ecosystem.
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This analysis explores the dynamic relationship between Bitcoin, stock market volatility, and gold during two critical periods: the COVID-19 pandemic and the U.S. monetary policy normalization phase beginning in March 2022. Using the Dynamic Conditional Correlation GARCH (DCC-GARCH) model, we assess whether Bitcoin functions as a hedge or safe haven asset compared to gold.
Literature Review: Bitcoin, Gold, and Market Shocks
The global financial landscape has been reshaped by both health crises and monetary policy shifts. The pandemic caused sharp declines in equity markets, while Bitcoin and gold exhibited contrasting yet significant behaviors.
Research shows that cryptocurrencies like Bitcoin react asymmetrically to market news—positive shocks often increasing volatility more than negative ones, unlike traditional assets. This unique behavior suggests potential diversification benefits. Studies by Cheikh et al. (2020) and Brini & Lenz (2024) highlight Bitcoin’s exponential growth potential and its ability to generate returns during volatile periods.
Several studies compare Bitcoin and gold as portfolio diversifiers. Platanakis & Urquhart (2019) found that adding Bitcoin to traditional stock-bond portfolios enhances risk-adjusted returns. Shahzad et al. (2020), however, argue that gold offers more stable hedging benefits than Bitcoin in G7 markets. Conversely, Bouri et al. (2020) show that Bitcoin outperforms gold and commodities in certain time-frequency bands, offering stronger diversification during specific market phases.
The relationship between asset classes intensified during the pandemic. Kakinuma (2021) observed increased independence among Southeast Asian markets, Bitcoin, and gold during the crisis. Terraza et al. (2024) used neural networks to analyze correlations and found that Bitcoin offered better diversification than gold for major U.S. indices like the S&P 500 during the pandemic.
Jiang et al. (2022) revealed that Bitcoin acts more as a hedge than a safe haven—meaning it helps reduce portfolio risk but doesn’t necessarily rise during crises. Murty et al. (2022) noted a positive correlation between Bitcoin and gold during the pandemic, suggesting investors viewed both as relatively safe assets—though Bitcoin’s status remained limited in some regions like India.
Crucially, U.S. monetary policy has increasingly influenced crypto markets. Che et al. (2023) demonstrated that Federal Reserve decisions significantly impact cryptocurrency prices—more so than traditional equities in some cases. Karau (2023) observed that Bitcoin began reacting to FOMC announcements after 2020, behaving more like a risky asset than an independent store of value.
These findings underscore a key insight: Bitcoin’s role as a hedge or diversifier is context-dependent, varying across regions, timeframes, and macroeconomic conditions.
Data and Methodology
Data Sources and Timeframes
This study analyzes daily closing prices from January 4, 2017, to December 28, 2023—a period covering three distinct phases:
- Pre-COVID-19 (Jan 4, 2017 – Jan 29, 2020)
- Pandemic Period (Jan 30, 2020 – Mar 16, 2022)
- Monetary Policy Normalization (Mar 17, 2022 – Dec 28, 2023)
Data includes major stock indices from ASEAN (Singapore, Malaysia, Indonesia), Asia (China, Japan, South Korea), Americas (U.S., Canada, Brazil), and Europe (UK, Germany, France), alongside Bitcoin and gold prices. Stock data is sourced from Bloomberg; crypto data from CryptoDataDownload.com.
Asset returns are calculated using logarithmic returns:
$$ {r}\_{t} = \ln(P_t) - \ln(P_{t-1}) $$
This method accounts for continuous compounding and simplifies multi-period return aggregation.
Descriptive statistics reveal higher mean daily returns pre-pandemic. During monetary tightening, several markets—including Singapore, Malaysia, Vietnam, and Canada—registered negative returns, indicating risk-averse investor behavior.
All return series passed stationarity tests (ADF and KPSS), ensuring suitability for GARCH modeling. The presence of ARCH effects justified the use of GARCH(1,1) models to capture volatility clustering.
Why DCC-GARCH?
The DCC-GARCH model is ideal for analyzing time-varying correlations between financial assets. Unlike the Constant Conditional Correlation (CCC) model, DCC allows correlations to evolve dynamically—critical during periods of market stress.
The model operates in two stages:
- Univariate GARCH estimation for each asset’s volatility.
- Dynamic correlation modeling, where conditional correlations adjust based on recent shocks and historical persistence.
The DCC framework assigns greater weight to recent observations, making it more responsive to sudden shifts—such as FOMC rate hikes or pandemic waves—than rolling-window methods.
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Key Findings: Bitcoin vs. Gold as Market Hedges
Dynamic Correlations During Crisis Periods
Using the DCC-GARCH model, we analyzed correlations between Bitcoin/gold and global stock indices across regions.
Pre-Pandemic: Limited Correlation
Before 2020, Bitcoin showed no significant correlation with any stock market index—supporting its early narrative as an independent digital asset.
During COVID-19: Emerging Linkages
The pandemic changed this dynamic. Significant correlations emerged between Bitcoin and stock markets in:
- Thailand (THA), Taiwan (TWN), Japan (JPN)
- United States (USA), Canada (CAN), Brazil (BRA)
- UK (GBR), Germany (DEU), Switzerland (CHE), France (FRA), Italy (ITA)
However, correlations in Asian emerging markets were weaker (<1% sensitivity), suggesting stronger hedging potential there.
Post-March 2022: Monetary Tightening Impact
Following the Fed’s first rate hike on March 17, 2022, correlations persisted across most markets—except Singapore, Malaysia, U.S., and Canada. Notably, Bitcoin’s link to advanced markets weakened, indicating reduced spillover effects.
Bitcoin vs. Gold: A Comparative Analysis
| Period | Bitcoin | Gold |
|---|---|---|
| Pre-COVID | No significant hedge role | Strong negative correlation with major indices → effective hedge |
| COVID-19 | Moderate hedging in Asia; limited in advanced markets | Positive correlation with most indices; weaker hedge |
| Post-Rate Hike | Limited effectiveness as hedge | Re-emerged as safe haven for ASEAN markets |
Gold showed significant negative correlations with U.S., UK, German, and Japanese markets pre-pandemic—confirming its traditional safe-haven status.
During monetary tightening, gold became a safe haven for ASEAN equities, while its links to American indices weakened.
Model Validation
Wald tests rejected the null hypothesis of constant correlation (CCC), favoring DCC models in most cases. AIC and BIC values were consistently lower for DCC models, confirming superior fit. Ljung-Box tests confirmed no residual autocorrelation—indicating well-specified models.
Frequently Asked Questions
Q: Is Bitcoin a safe haven like gold?
A: No—gold consistently acts as a safe haven during crises, especially pre-pandemic. Bitcoin shows hedging potential in specific contexts but behaves more like a risky asset during macroeconomic shocks.
Q: How did U.S. interest rate hikes affect Bitcoin?
A: Starting in March 2022, rate hikes triggered a prolonged decline in Bitcoin prices. The DCC-GARCH model shows increased sensitivity to monetary policy after 2020, indicating growing integration with traditional financial systems.
Q: Can Bitcoin diversify a stock portfolio?
A: Yes—but selectively. During the pandemic, Bitcoin offered diversification benefits in Asian and emerging markets. In advanced economies during tightening cycles, its effectiveness diminishes due to rising correlations with equities.
Q: Why use DCC-GARCH instead of simple correlation?
A: Simple correlations assume static relationships. DCC-GARCH captures time-varying dynamics, crucial for understanding how assets behave differently during calm vs. crisis periods.
Q: Did gold lose its safe-haven status during the pandemic?
A: Temporarily—gold showed positive correlations with most stock markets during peak uncertainty. However, it regained its role during monetary tightening, especially in ASEAN regions.
Q: What does “hedge” vs “safe haven” mean?
A: A hedge reduces portfolio risk over time; a safe haven appreciates during crises. Gold serves both roles at different times; Bitcoin primarily functions as a conditional hedge.
Conclusion
The interplay between global health crises, monetary policy shifts, and digital asset evolution has redefined modern portfolio strategies. This study reveals that while Bitcoin offers diversification benefits, its effectiveness as a hedge varies significantly by region and macroeconomic phase.
Gold remains the more reliable safe-haven asset—especially before and after major policy shifts—while Bitcoin’s role is emerging but inconsistent. During the pandemic, both assets provided hedging value in Asia, America, and Europe—but gold demonstrated greater robustness.
For investors, these insights underscore the importance of contextual asset allocation. Relying solely on historical behavior can be misleading; dynamic models like DCC-GARCH provide deeper understanding of evolving market relationships.
As central bank policies continue to shape financial landscapes in 2025 and beyond, integrating both traditional and digital assets—with data-driven tools—will be key to building resilient portfolios.
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Core Keywords:
Bitcoin volatility, DCC-GARCH model, stock market correlation, U.S. monetary policy impact, cryptocurrency hedging, gold as safe haven, financial market risk