Gold-backed cryptocurrencies in cryptocurrency portfolios: Evaluating their hedging capabilities and safe-haven characteristics during extreme market conditions
DOI:
https://doi.org/10.24136/oc.3272Keywords:
cryptocurrencies, hedging effectiveness, time-varying copula, COVID-19, Russian-Ukrainian crisisAbstract
Research background: This paper explores the hedging and safe-haven properties of gold-backed cryptocurrencies within the context of conventional cryptocurrencies such as Bitcoin, Ethereum, Tether, and Binance. With the rise of blockchain technology, cryptocurrencies have gained recognition as alternative investment assets, drawing comparisons to traditional safe-haven assets like gold. However, the risk management potential of crypto gold, especially during periods of extreme market volatility, remains under-examined.
Purpose of the article: The purpose of this article is to assess the effectiveness of gold-backed cryptocurrencies as hedging instruments and safe havens for investors in conventional cryptocurrencies. By analyzing their tail dependence during extreme market fluctuations, the study aims to determine their risk management utility.
Methods: To achieve this, we employ a Student’s t copula structure integrated with an ARMA-GJR-GARCH model to measure the time-varying tail dependence between gold-backed and conventional cryptocurrencies. This approach allows for a comprehensive analysis of both normal and extreme market conditions. We use the Digix Gold Token (DGX) as a representative of gold-backed cryptocurrencies. The study examines four major conventional cryptocurrencies — Bitcoin (BTC), Ethereum (ETH), Tether (USDT), and Binance (BNB) — by analyzing daily closing prices from May 14, 2018, to January 31, 2023, which comprise 1702 observations. The dataset, sourced from coincodex.com, includes periods of significant market stress, such as the COVID-19 pandemic and the Russian-Ukrainian conflict.
Findings & value added: The findings reveal a weak association between gold-backed cryptocurrencies and conventional cryptocurrencies, resulting in medium-to-low hedging effectiveness during the sample period. Nevertheless, during crisis periods, a negative association is observed, indicating that gold-backed cryptocurrencies act as effective safe havens in times of market distress. The study contributes to the literature by providing empirical evidence on the risk management benefits of crypto gold, particularly during financial crises, and highlights its potential inclusion in portfolios with cryptocurrency investments to enhance resilience.
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