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Study: Bitcoin Hedges Global Uncertainty

Andrew Quentson on 08/01/2017

A newly released study on the relationship between bitcoin and global uncertainty finds that bitcoin acts positively to uncertainty. Analyzing a lengthy period from the 17th of March, 2011, to the 7th of October, 2016 by using the VIX index, a widely used key market risk indicator that reflects market sentiment and investor expectation of 14 countries, Brazil, Canada, China, France, Germany, India, Japan, Mexico, Russia, South Africa, Sweden, Switzerland, the UK and the US, the study concludes:

“Bitcoin is shown to serve as a hedge against uncertainty at the extreme ends of the Bitcoin market and global uncertainty, but at shorter investment horizons. Therefore, short-horizon investment in Bitcoin can help investors hedge global equity market uncertainty, especially when the market is functioning in bear and bull regimes and also when uncertainty is either low or high.”

By using a quantile regression framework as well as a well-known method of wavelets to decompose Bitcoin returns into its various investment horizons, the study was able to provide a more nuanced view in analyzing the effect of different levels of uncertainty as well as different time frames. The study [PDF] finds that:

“[T]he ability of Bitcoin to act as a hedge against uncertainty is conditional on not only whether the market is in bear or bull regime but also whether global uncertainty is high or low. Specifically speaking, at shorter investment horizons, Bitcoin returns seem to hedge against the global uncertainty at extreme ends of both Bitcoin returns and uncertainty.”

Bitcoin’s role as a hedge against uncertainty has widely been speculated recently, especially following the digital currency’s surpassing of gold parity in its most popular and liquid exchanges. It”/-s accelerated bull run since summer coincided with a number of monetary miscalculations by authorities in as diverse countries as China, India, Brazil, Venezuela, Nigeria and others, leading to an increased interest in bitcoin according to internet searches, sending the price higher and higher.

The study’s confirmation of this role may increase serious interest in bitcoin as an asset class sui generis which acts as a hedge when uncertainty is both very high and very low, potentially leading to its inclusion in more established trading houses to minimize risks while trying to maximize gains.

It’s increased market cap to surpass that of Twitter may further aid towards such aim, with the currency significantly maturing since its amateurish early days in 2011 and even 2013, leading to a marked decrease in volatility by comparison, and thus a decrease in risk, so far in any event.