Introduction
Financial markets play a crucial role in economic development by facilitating capital allocation between investors and businesses. Efficient markets enable companies to raise funds, expand operations, and drive growth. However, market volatility—especially during crises—can deter investors due to concerns about capital loss. Risk mitigation remains a top priority for traders and investors.
The COVID-19 pandemic triggered widespread economic disruption, leading to stock market declines and heightened investor uncertainty. Many shifted toward perceived safe-haven assets like gold, known for preserving value during downturns. Simultaneously, cryptocurrencies, particularly Bitcoin (BTC), gained traction as alternative investments for portfolio diversification.
Why Bitcoin?
- Market Dominance: Bitcoin accounts for over 51% of the total crypto market cap, valued at $851 billion as of 2024.
- Growth: BTC’s market cap surged by 161.4% between 2022 and 2023.
- Correlation: It exhibits a 52% average cross-correlation with other crypto assets.
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This study examines Bitcoin’s dynamic relationship with global stock markets during COVID-19 and U.S. monetary policy shifts, comparing its hedging potential to gold.
Literature Review
Key Findings from Existing Research
- COVID-19 Impact:
- Stock markets declined sharply, while Bitcoin and gold showed resilience (Chen et al., 2020).
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Cryptocurrencies reacted asymmetrically to news, with volatility spikes from positive shocks (Cheikh et al., 2020).
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Bitcoin vs. Gold:
- Gold offers more stable diversification benefits than Bitcoin for G7 stocks (Shahzad et al., 2020).
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Bitcoin outperformed gold and commodities in time-frequency dependency analyses (Bouri et al., 2020).
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Monetary Policy Effects:
- Bitcoin prices became sensitive to U.S. Federal Reserve announcements post-2020 (Karau, 2023).
- Crypto markets declined by 0.15 standard deviations in response to Fed policy shifts (Che et al., 2023).
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Methodology
Data Sources
- Stock Indices: Bloomberg (ASEAN, Asia, Americas, Europe).
- Bitcoin: CryptoDataDownload.com (daily prices: 2017–2023).
Analytical Approach: DCC-GARCH Model
The Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroskedasticity (DCC-GARCH) model was used to assess time-varying correlations between assets.
Advantages of DCC-GARCH:
- Captures volatility clustering and market synchronization.
- Provides accurate conditional variance estimates.
- Outperforms CCC-GARCH in dynamic correlation analysis (Engle, 2002).
Equation:
$$
{r}{t}=\mathrm{ln}\left({P}{t}\right)-\mathrm{ln}({P}{t-1})
$$
Where:
– ( {P}{t} ): Closing price at time t.
– ( {P}_{t-1} ): Prior closing price.
Results
Key Observations
- Pre-Pandemic (2017–2020):
- No significant correlation between Bitcoin and stock indices.
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Gold showed negative correlations with major markets (e.g., U.S., Japan), acting as a hedge.
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COVID-19 Period (2020–2022):
- Bitcoin correlated positively with 11 major stock indices (e.g., S&P 500, DAX).
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Gold’s hedging properties were more robust.
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Monetary Policy Normalization (2022–2023):
- Bitcoin’s correlation with advanced markets (U.S., Europe) weakened.
- Gold became a safe haven for ASEAN stocks post-rate hikes.
Statistical Insights
| Metric | Bitcoin | Gold |
|---|---|---|
| ARCH Significance | Yes | Yes |
| GARCH Persistence | High | High |
| Hedge Potential | Limited | Strong |
Conclusion
Takeaways for Investors
- Bitcoin: Effective for diversification during crises but less reliable as a long-term hedge.
- Gold: Consistently serves as a safe haven, especially during policy shifts.
- Regional Variances: ASEAN markets showed stronger hedging potential with gold post-2022.
Policy Implications
Monetary policy uncertainty significantly impacts asset volatility, necessitating adaptive investment strategies.
FAQs
1. Is Bitcoin a safe-haven asset?
Bitcoin showed hedging potential during COVID-19 but underperformed gold during monetary policy shifts.
2. How does gold compare to Bitcoin for risk management?
Gold offers more stable diversification benefits, particularly in advanced economies.
3. Which markets benefit most from Bitcoin diversification?
Emerging Asian markets (e.g., Thailand, Taiwan) displayed lower sensitivity to BTC volatility.
4. Did U.S. interest rate hikes affect crypto markets?
Yes—Bitcoin’s correlation with stocks declined post-rate hikes, reflecting reduced hedging utility.
5. What’s the best asset for portfolio diversification?
A mix of gold (stability) and Bitcoin (growth potential) may optimize risk-adjusted returns.
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