This important result is shown to hold across a range of different allocation weightings and periods. Our analysis indicates that adding Bitcoin to a portfolio results in increased downside risk relative to holding the S&P 500 alone. We are among the first papers to isolate the safe haven properties of Bitcoin during a severe market downturn. Our empirical findings contribute to the literature assessing the effectiveness of safe haven assets. Specifically, we follow the approach of Bredin et al. (2017), by accounting for skewness and kurtosis in a four-moment downside risk framework. In calculating VaR and CVaR, we employ the Cornish-Fisher expansion, a method appropriate to incorporate higher-order distributional characteristics associated with extreme price movements. Specifically, we quantify the relative change in portfolio value at risk (VaR) and conditional value at risk (CVaR), two common measures of downside risk. We explicitly test whether any diversification benefits from holding Bitcoin are evident in the highly volatility market associated with the Covid-19 crisis. Given this background, we propose an alternative testable hypothesis: Bitcoin is not a safe-haven for S&P 500 investors during the Covid-19 pandemic. This speculative nature may result in selling pressure during extreme downward markets, providing limited effectiveness as a store of value ( Yermack, 2015). Baur et al. (2018) demonstrate that Bitcoin is mainly employed as a speculative investment. Bouri et al. (2017a) demonstrate that Bitcoin has limited hedging properties and only has safe-haven characteristics for Asian stocks. The early empirical evidence regarding Bitcoin’s hedging and safe-haven properties are not, however, comprehensively supported. On this basis we hypothesize that Bitcoin acts as a safe-haven for the S&P 500 during the Covid-19 market downturn. Moreover, Bitcoin is independent of monetary policies and, similar to commodities such as gold, limited in quantity by mining constraints. Although not examined through a period of acute losses, Bitcoin has also been shown to correlate positively with downward markets ( Klein et al., 2018), implying that it may act as a store of value during severe market declines. We build upon the previous literature by providing an assessment of the safe haven properties of Bitcoin for a traditional asset during a period of acute price decreases in equity markets.ĭiversification benefits across assets have been shown to decrease in times of high market volatility ( Campbell et al., 2002). Goodell (2020), in particular, sets out a research agenda highlighting possible impacts of COVID-19 on financial markets and institutions. The ongoing Covid-19 pandemic and associated financial turbulence has led to a profusion of working papers, some examining cryptocurrency implications ( Alfaro, Chari, Greenland, Schott, 2020, Corbet, Hu, Lucey, Oxley, 2020, Corbet, Larkin, Lucey, 2020, Jabotinsky, Sarel, Jana, Das). In recent years, the growing popularity of cryptocurrencies has inspired numerous studies of their diversification, hedging and safe haven properties ( Urquhart, Zhang, 2019, Smales, 2019, Shahzad, Bouri, Roubaud, Kristoufek, Lucey, 2019, Kliber, Marszałek, Musiałkowska, Świerczyńska, 2019, Guesmi, Saadi, Abid, Ftiti, 2019, Aysan, Demir, Gozgor, Lau, 2019, Corbet, Meegan, Larkin, Lucey, Yarovaya, 2018, Bouri, Molnár, Azzi, Roubaud, Hagfors, 2017). Such loss aversion leads to alterations in optimal portfolio choice ( Berkelaar et al., 2004) and may prompt investors to seek out safe haven investments such as gold ( Conlon, Lucey, Uddin, 2018, Bredin, Conlon, Potì, 2015, Baur, Lucey, 2010). Investor loss aversion implies a greater sensitivity to acute losses than gains and has been demonstrated in experimental settings ( Tversky and Kahneman, 1991). Specifically, we examine whether an investor with a proportion of wealth allocated to Bitcoin can reduce their exposure to downside risk relative to a portfolio consisting only of equities. In this paper, we provide a first assessment of the safe haven properties of Bitcoin during a period of significant turmoil in financial markets, the Covid-19 bear market. While many of these arguments are compelling, empirical tests of the safe haven properties of Bitcoin have been devoid of a central component, a severe financial markets crisis. Bitcoin has been proposed as a safe haven for traditional assets for many reasons, including independence from monetary policy, a role as a store of value and limited correlation with traditional assets.
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