Is Bitcoin a hedge? How extreme volatility can destroy the hedge property

Dirk G. Baur, Lai T. Hoang and Md Zakir Hossain

Finance Research Letters, 2022, vol. 47, issue PB

Abstract: A large literature tests whether Bitcoin can hedge portfolio risk, i.e. reduce the risk if added to a portfolio. Intuitively, given the extreme volatility and thus risk of Bitcoin and cryptocurrencies, the idea that Bitcoin is a hedge may be puzzling. Indeed, we show that for extreme levels of volatility, Bitcoin does not reduce the risk if added to a benchmark equity portfolio. This is not only true on average but also holds for sub-samples, including the COVID-19 crisis period. We conclude that a focus on correlations is not sufficient for extreme levels of volatility.

Keywords: Bitcoin; Hedge; Portfolio diversifier (search for similar items in EconPapers)
JEL-codes: G00 G10 G11 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:47:y:2022:i:pb:s1544612321005857

DOI: 10.1016/j.frl.2021.102655

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