Does the big boss of coins—Bitcoin—protect a portfolio of new-generation cryptos? Evidence from memecoins, stablecoins, NFTs and DeFi

Monika Chopra, Chhavi Mehta, Prerna Lal and Aman Srivastava

China Finance Review International, 2023, vol. 14, issue 3, 480-521

Abstract: Purpose - The purpose of this research is to primarily understand how crypto traders can use the Bitcoin as a hedge or safe haven asset to reduce their losses from crypto trading. The study also aims to provide insights to crypto investors (portfolio managers) who wish to maintain a crypto portfolio for the medium term and can use the Bitcoin to minimize their losses. The findings of this research can also be used by policymakers and regulators for accommodating the Bitcoin as a medium of exchange, considering its safe haven nature. Design/methodology/approach - This study applies the cross-quantilogram (CQ) approach introduced by Hanet al.(2016) to examine the safe-haven property of the Bitcoin against the other selected crypto assets. This method is robust for estimating bivariate volatility spillover between two markets given unusual distributions and extreme observations. The CQ method is capable of calculating the magnitude of the shock from one market to another under different quantiles. Additionally, this method is suitable for fat-tailed distributions. Finally, the method allows anticipating long lags to evaluate the strength of the relationship between two variables in terms of durations and directions simultaneously. Findings - The Bitcoin acts as a weak safe haven asset for a majority of new crypto assets for the entire study period. These results hold even during greed and fear sentiments in the crypto market. The Bitcoin has the ability to protect crypto assets from sharp downturns in the crypto market and hence gives crypto traders some respite when trading in a highly volatile asset class. Originality/value - This study is the first attempt to show how the Bitcoin can act as a true matriarch/patriarch for crypto assets and protect them during market turmoil. This study presents a clear and concise representation of this relationship via heatmaps constructed from CQ analysis, depicting the quantile dependence association between the Bitcoin and other crypto assets. The uniqueness of this study also lies in the fact that it assesses the protective properties of the Bitcoin not only for the entire sample period but also specifically during periods of greed and fear in the crypto market.

Keywords: Bitcoin; Crypto assets; Cross-Quantilogram; Portfolio management; Heatmap (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eme:cfripp:cfri-03-2023-0076

DOI: 10.1108/CFRI-03-2023-0076

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