Abstract
This study investigates whether Bitcoin may act as a safe haven in the capital markets, including France (CAC 40), Germany (DAX 30), the US (DJI), the UK (FTSE 100), Italy (FTSE MIB), Hong Kong (HANG SENG), Spain (IBEX 35), South Korea (KOSPI), Russia (IMOEX), and Japan (NIKKEI 225), as well as in commodities such as gold (GOLD HANDY HARMAN) and petroleum (WTI), and U.S. 10-year sovereign yields, during the 2020-2022 events. The authors analyze the financial integration and movements of markets to understand how BTC behaves during periods of global economic uncertainty. During the stress period, BTC did not integrate with the analyzed markets, suggesting that BTC exhibits properties of a hedge and a safe haven. BTC has properties of a hedge and a safe haven, and investors in these markets can benefit from investing in it as a secure asset and hedge. It is affected by CAC 40, FTSE 100, HANG SENG, and NIKKEI 225 stock indexes, and investors must carefully evaluate their investment strategies and risk tolerance when including BTC in their portfolio.
TopIntroduction
Within the field of contemporary finance, the emergence of Bitcoin as a digital currency and payment mechanism, initially proposed by Nakamoto (2016), has sparked considerable academic and practical enthusiasm. Bitcoin is characterized by its decentralized nature, functioning on a complex protocol that operates without a central authority, which sets it apart from traditional fiat currencies. One noteworthy attribute of Bitcoin is its predetermined supply, a distinctive feature established by the protocol's design that distinguishes it as an exceptional financial asset (Dwyer 2015). Since its inception in 2009, Bitcoin has experienced a remarkable increase in worth, reaching an impressive valuation of $457,807,981,534 as of February 2023, as documented in the study conducted by Bouri et al. (2017). The significant increase in value of Bitcoin has generated considerable academic curiosity, leading to a growing body of research focused on exploring the economic and financial complexities associated with this cryptocurrency. Academic investigations into the multifaceted nature of Bitcoin encompass a wide range of dimensions.
In their work, Rogojanu and Badea (2014) conducted a comparative analysis to examine the position of Bitcoin within different monetary systems. Brandvold et al. (2015) and Ciaian et al. (2016) have conducted research on the topic of price discovery in Bitcoin markets, uncovering significant findings. Bouri et al. (2020) have focused their research on examining the impact of trading volume on the return and volatility of Bitcoin. In a similar vein, Balcilar et al. (2016) have developed complex models to effectively capture the persistence and existence of long-term memory effects in the behavior of Bitcoin. Yermack's (2015) provides a comprehensive analysis that categorizes Bitcoin primarily as a speculative investment rather than a legitimate currency. This classification is primarily based on the significant market capitalization of Bitcoin in relation to its practical usefulness in economic transactions. However, it is worth noting that empirical data indicates that the inclusion of Bitcoin in a diversified portfolio has proven to be a profitable strategy, despite the inherent volatility that is typically associated with this specific digital asset. This conclusion is supported by the research conducted by Brandvold et al. (2015).
The recognition of Bitcoin as a potential alternative to conventional currencies has garnered attention within academic spheres. The topic of an alternative economic system is often a subject of frequent discussion, as highlighted by Halaburda and Gandal (2014). In situations where investors witness a decrease in trust in well-established government-issued currencies or hold apprehensions regarding the overall economic landscape, Bitcoin could potentially emerge as an attractive substitute. The nickname “digital gold” has been attributed to Bitcoin, a characterization effectively expressed by Popper (2015). Furthermore, according to Dyhrberg (2016), Bitcoin possesses a coverage capacity similar to that of gold and the U.S. dollar. This implies that Bitcoin has the potential to function as a hedge for assets like the UK stock market and the U.S. dollar. Nevertheless, it is important to acknowledge that although extensive research has been conducted on Bitcoin's role as a speculative investment and its potential as an alternative to conventional currencies, there is still a significant gap in the existing body of research. This gap refers to the evaluation of Bitcoin's diverse functions as a tool for diversification, hedging, and a safe haven against price volatility across various assets, including stock indexes, bonds, oil, gold, the overall commodity index, and the US dollar index. The suitability of an asset for investment is contingent upon its correlation with other assets, as viewed from a risk perspective.
Key Terms in this Chapter
Volatility: The concept of volatility in the cryptocurrency market pertains to the tendency of digital currencies to undergo swift and substantial price swings over a short period of time. This phenomenon presents both some possible benefits and risks for individuals involved in investment activities.
Hedging: Hedging refers to the act of assuming positions in assets or employing strategies with the purpose of mitigating prospective losses in alternative investments, hence reducing the systemic risk.
Safe Haven: Safe havens refer to assets that investors typically prefer during periods of market uncertainty or volatility in order to protect their capital. These assets are typically defined by low-risk profiles.
Cryptocurrencies: Cryptocurrencies refer to digital or virtual currencies that employ cryptographic techniques to ensure security and function on a decentralized infrastructure known as blockchain. Cryptocurrencies facilitate secure peer-to-peer transactions and frequently function as a means of exchange, store of value, or digital asset.
Co-Movements: The principle of co-movements in financial markets pertains to the tendency of various assets to exhibit synchronized movements, either in the same direction (positive co-movements) or in opposite directions (negative co-movements). A variety of variables, including current economic conditions, market sentiment, and outside events, can affect the correlation between these movements.
Portfolio Diversification: Portfolio diversification is a risk mitigation strategy that entails distributing investments over a range of assets or asset classes in order to mitigate the overall risk and volatility associated with a portfolio.
Financial Integration: Financial integration covers the interdependence and alignment of financial systems, including markets, institutions, and regulations, with the aim of facilitating the flow of capital, investments, and financial services across national boundaries and inside domestic economies.