Stablecoins as a tool to mitigate the downside risk of cryptocurrency portfolios

Antonio Díaz, Carlos Esparcia and Diego Huélamo

The North American Journal of Economics and Finance, 2023, vol. 64, issue C

Abstract: This paper empirically assesses the ability of three putative stablecoins (two dollar-backed, Tether and USD Coin; and one gold-backed, Digix Gold) to mitigate the risk of facing severe losses (downside risk) of a traditional cryptocurrency portfolio. There are institutional features that induce cryptoinvestors to use stablecoins as diversifiers instead of withdrawing dollars or adding assets traditionally considered as safe havens, such as gold, crude oil, etc. Stablecoins, however, are not as stable as their name and collateralized peg suggest. A monthly rebalance experiment is conducted over an out-of-sample period considering higher order conditional moments when dynamically measuring the tail risk of cryptocurrency portfolios. The empirical evidence shows that the low conditional correlations of dollar-backed stablecoins with cryptocurrency portfolios make them particularly suitable as a hedge for crypto investors. It also shows that all stablecoins considered have high diversification capacities by systematically reducing portfolio tail risk.

Keywords: Co-skewness; Co-kurtosis; Cryptocurrency; Modified VaR; Portfolio allocation; Stablecoin (search for similar items in EconPapers)
JEL-codes: C13 C62 D58 G11 G17 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:64:y:2023:i:c:s1062940822001735

DOI: 10.1016/j.najef.2022.101838

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