1 University of Amsterdam
BSc - Economics & Finance Bachelor thesis
Is Bitcoin a (good) diversifier or does it have hedge or
safe haven capabilities against the DAX30 ,S&P 500,
Nikkei 225.
Abstract
Curious by the recent price rise of Bitcoin, I want to look at the hedge / safe haven capabilities of Bitcoin against the DAX30, S&P500, Nikkei 225. The CAPM model is used to
determine whether Bitcoin is a safe haven/ hedge. In addition daily returns of gold and bitcoin are compared against the market indexes.
Name : Pepijn Bakker
Student Number : 10562729 Supervisor : Liang Zou Date : 31/01/201
2 Statement of Originality
This document is written by Student Pepijn Bakker who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
3 Contents
1.Introduction ………P.4
2.Literature review………P.5 2.1 Is Bitcoin a currency or not………P.5 2.2 Economy of Bitcoin……..………..P.5 1.4 Gold a proven hedge/ safe haven ………P.6 2.4 Safe haven / hedge possibilities of Bitcoin ………P.7 3. History of Bitcoin………..P.8 3.1 Creation of Bitcoin………..P.8 3.2 Blockchain technology………..P.8 3.3 Price history / volatility Bitcoin………..P.9 3.4 Bitcoin energy footprint………P.12 4. Hypotheses and Methodology………..P.14 5. Data……….P.16 6. Conclusion………..P.19 References ………..P.20
4 Introduction
There are not many subjects in finance/economics last year , that got so much attention as Bitcoin. During the last months of 2017 , Bitcoin rallied to an all-time high of 20.000 us dollars( coinmarketcap, 2017). Is Bitcoin mature enough to be called digital cash? Some people of the ‘’old’’ financial world attack bitcoin , one of them was Jamie Dimon , he called bitcoin a fraud( Pollock, 2017) Recently he and JPMorgan came back to this statement and recently analysts at JPMorgan believe that Bitcoin might be seen as an asset class, which means it’s no longer a currency.
Another thrilling event for Bitcoin is that in a recent survey a third of millennials rather own Bitcoin than stocks(Arnold , 2018) So there is a potentially massive upside for the Bitcoin market , if some participants of this survey put money where their mouth is.
Bitcoin is a relatively new financial asset , created in 2008 by Nakatomo , and since its creation people discuss over its function(nakamoto , 2008). In this research I want to look whether Bitcoin can serve as a safe haven, hedge in the digital world. One would not expect that the returns of Bitcoin would be affected by financial markets, since its decentralized and doesn’t depend on the growing economy. Therefore the comparison to gold seems to be valid. But on the other hand Bitcoin is relatively new , and new financial assets always needs to prove itself. It is likely that Bitcoin needs to fail a couple of times before its
accepted widely by investors. Another disadvantage of Bitcoin is that the technology behind it is not entirely understood by Investors. Can Bitcoin serve the same purpose as Gold , meaning is it a good financial asset when stock markets are declining/ not performing (Bouri et all, 2016).
This research will look at the safe heaven /hedge possibilities of Bitcoin against the DAX30 , S&P500 and Nikkei 225. The estimated Beta of Bitcoin will be compared with the Beta of gold. The Beta’s of both will be calculated with a CAPM model. Furthermore the daily returns of Gold, Bitcoin and the markets will be compared. This will give an broad idea of the volatility of the different markets/assets.
The following section will briefly explain the history of Bitcoin and the pros and cons of Bitcoin. Then there will be a literature review, followed by an explanation of the research method. In the dataset the data will be presented and explained , furthermore there will be a conclusion based on the data and the derived Beta’s of the CAPM model.
5 Literature review
2.1 Is Bitcoin a currency or not?
In the literature about Bitcoin there is a debate about what Bitcoin is. Can Bitcoin be seen as a traditional currency , or is it more like gold a store value. Rogojanu and Badea (2014) think Bitcoin works like gold, but in a virtual environment. They see similarities between gold and Bitcoin. Supply of both is limited , exploiting it cost you money ( electricity cost vs mining cost) but it’s worth is since supply is limited. Regarding the future of Bitcoin they are a bit more pessimistic , the success of Bitcoin they think will depend on the consumer confidence in Bitcoin and the regulations of governments(Rogojanu, Badea, 2014).
Yermack(2013) in turn comes to a completely different conclusion. He states that Bitcoin appears to behave more like a speculative investment than like a currency. In his research Bitcoin daily exchange rate exhibits almost zero correlation with regular(US dollar , Euro , yen) currencies, which in turn makes Bitcoin useless for risk management purposes and it’s very difficult to find a hedge for Bitcoin. Another disadvantage Yermack(2013) sees is that Bitcoin is not backed by a banking system or central bank deposit insurance , so u could lose all invested your money. But on the other hand that’s also the benefit of Bitcoin , it’s not regulated or controller by any organisation or government (Yermack, 2013)
The paper of Glaser Zimmerman Haferkorn Weber and Siering (2014) tries to research what the intentions of various Bitcoin investors is. Do investors see Bitcoin as an alternative to traditional currency or do they see it as an alternative investment vehicle. They find strong indications that Bitcoin is primarily used as an speculative investment rather than an
alternative transaction system. New users of Bitcoin have low understanding of how Bitcoin works , and the main intention of new investors is mainly the high returns Bitcoin has achieved( Glaser et all, 2014).
2.2 Economy of Bitcoin
Ciaian , Rajcaniova and Kancs (2016) is the first article to talk about the economics behind bitcoins price formation. Previous paper found that to a large extend , bitcoins price is determined by interactions between its supply and demand. (Buchholz et all, ) . Another paper published by Kristoufek (2013) , says the price formation of bitcoin can’t be explained with standard economic theories , because bitcoin is not issued by a specific central bank or government , nor has it any affliction with excising economic markets. And indeed
Bouoiyour and Selmi (2015) find support that Bitcoin is largely detached from
macroeconomic fundamental and rather behave as a speculative Bubble. Van Wijk (2013) comes to the conclusion that in the long run the bitcoin price is effected by stock exchange indices, exchange rates and oil prices. In their own paper , Ciaian et all (2016) support the hypothesis that market forces of supply and demand have an important impact on Bitcoins price . Secondly they cannot reject the hypothesis that bitcoins price is affected by
speculative behaviour of bitcoin investors, both in the long and short run. They find no support that macro-financial indicators are driving the Bitcoin price. The final conclusion is that there are many different drivers of bitcoin price simultaneously, if you only look at one factor it could lead to a bias(Ciaian et all, 2016).
6 Dywer (2014) researched the economics of bitcoin and other similar (private) digital
currencies. In this paper Dywer (2014) concludes that bitcoin (blockchain) solves the double transaction problem of earlier electronic coins. He states Bitcoin embodies a major
innovation in trading, it’s now possible to trade with someone on the other side of the world without the need of trust in a central authority. Dywer (2014) sees one major
difference between a regular currency and bitcoin , the finality of transactions in the bitcoin system is not guaranteed by any institution , its decentralized. While on the other hand banks check whether fiat transactions are approved. He questions whether there is a
demand for such a decentralized way of payment between people. He states in other words , do you trust anonymous people with your money (Dywer, 2014). Another factor that could reduce the demand of Bitcoin , is that governments will try to regulate the crypto market. Because there is widespread believe that cryptocurrencies are used to evade capital controls (Dywer, 2014).
2.3 Gold a proven hedge/ safe haven
There are several papers that investigate the safe heave/ hedge capabilities of gold against the dollar. Capie Mills and Wood (2005) come up with several arguments why gold has been a hedge against the dollar for the last thirty years. Gold has served as a hedge because it’s a homogeneous asset unlike , for instance property and therefore its easily traded in a
continuously market. Another big advantage of gold is that governments and central banks can’t create more gold. Therefore price in the gold market is created by demand and supply , while the FED can create a large supply of money which in turn leads to inflation of the dollar(Capie et all, 2005). Gold has not been a hedge for the dollar the entire thirty years of research , there were periods of time when gold was not a good hedge. One of the reasons gold is not always a hedge , is that the supply of gold was temporarily stuck. Another reason is that large investors in gold , governments or central banks can sell a large amount of gold which leads to a significant price drop of gold. (Capie et all, 2005).
In another paper Reboredo and Castro (2014) come to a different conclusion. They state that financial media and investors believe that the gold price in USD and the USD value tend to move in opposite directions. This movement would suggest that gold is a good
diversification against movements in USD, so gold would seem a good hedge and safe haven against the movements in USD (Renoredo, Castro, 2014) . Renoredo and Castro
(2014)provide evidence that gold is an effective weak safe haven asset, because a
depreciation of USD results in a rise of the gold price. Furthermore gold is an effective hedge against the dollar because the USD and gold are negatively related, which means hedging strategies with gold are viable.
2.4 Safe haven / hedge possibilities of Bitcoin
There are several papers about Bitcoin as a hedge or safe haven. Roughly papers before 2016 come to the conclusion that Bitcoin is too volatile to be used as a hedge or safe haven, papers after 2016 see some specific cases where Bitcoin can serve as a hedge or safe haven. Bouri et all (2017) come to the conclusion that bitcoin is not as liquid as normal assets and therefore its usage as hedge is limited. Bouri et all (2017) also conclude that bitcoin as an
7 investment diversifier is much more likely than bitcoin as a hedge. Bouri et all (2017) used daily and weekly data within a DCC model , they came to the conclusion that Bitcoin can serve as an effective diversifier in most cases. They also come to the conclusion , that just in a few cases, Bitcoin has hedge and safe haven properties that differed between horizons. On the other hand Dyhrberg (2016) concludes that bitcoin certainly has hedging capabilities against the FTSE index. She comes to the conclusion that Bitcoin alongside gold can be used to minimize specific market risks, FTSE index in this case. The results for bitcoin as a hedge against the dollar were a bit different. It did show some hedging capabilities against the dollar in the short term , indicating that the high frequency trading of bitcoin creates suitable conditions for such hedging. Dyhrberg (2016) further stated that bitcoin can be added to the list of instruments of gold on other assets that minimizes risk. The final conclusion of Dyhrberg (2016) is that Bitcoin can be added to the list of instruments of gold and other assets to minimize risk. Especially because bitcoin is traded continuously and with high frequencies with no days where trading is closed. Additionally as bitcoin is traded at high and continuous frequencies with no days where trading is closed, like other assets, bitcoin has specific speed advantages and that could make it a good hedge and a good portfolio diversifier ( Dyhrberg, 2016)
Dyhrberg (2015) also made a paper on the similarities between bitcoin to both gold and the dollar. She came to the conclusion that there are many similarities between them , but that bitcoin will never behave and act like a real currency because its decentralized and largely unregulated. She run a GARCH model to compare gold and bitcoin and found that they reacted to similar variables in the model. Bitcoin and gold therefore possess similar hedging capabilities and react the same to good and bad news. There is one important difference between gold and bitcoin ,and that’s the frequency of trading of bitcoin. Bitcoin markets react faster to news and sentiment than the gold market. That indicates that Bitcoin’s price fluctuates a lot more than gold (Dyhrberg, 2015).
The overall conclusion of Dyhrberg (2015) is that Bitcoin is somewhere in between an currency and a commodity. Additionally she states that Bitcoin can be used as a tool for risk averse investors in anticipation of bad news. Bitcoin’s position is in between the gold and the dollar , where gold is being pure for store value, and the dollar is a medium of exchange. Bitcoin can combine advantages of both sides , store value and medium of exchange,
therefore it can be a useful tool for portfolio management , risk analysis and market sentiment analysis (Dyhrberg, 2015).
8 History of Bitcoin
3.1 Creation of Bitcoin
The recent surge in Bitcoin prices , led common investors and regular consumers to invest in Bitcoin. What is Bitcoin exactly and how does it work . First I will talk about the creation of Bitcoin by Satoshi Nakamoto, and what his intention of Bitcoin was (Nakamoto, 2008). On October 31st 2008 Nakamoto released a whitepaper called Bitcoin: A Peer-to-Peer
Electronic Cash System. Nakamoto describes a way of payment in his paper where financial institutions are no longer needed. He describes Bitcoin as ‘’a purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution.’’ Nakamoto wants to achieve this by introducing a blockchain , a log of all the mined blocks. Blocks are mined with computer hardware and the block time is fixed at one block per 10 minutes. Transaction are included in blocks and checked by miners, and all blocks are stored in the blockchain (Nakamoto, 2008) .
3.2 Blockchain technology
The blockchain technology needs some explanation. Bitcoin is a so called mineable coin , there exist preminted/premined coins , but I will reduce this study to Bitcoin alone. Since bitcoin is a mineable coin , coins need to be mined by miners. Approximately every ten minutes miners find a new block which rewards them with 2 bitcoin + transaction fees at that moment(blockchain.info). So miners do not only earn the reward of the block , they also earn transaction fees of people who send bitcoins (Nakamoto , 2008). The blockchain includes all the blocks mined by the bitcoin miners, today the number of blocks is 503547 , every Bitcoin block is approximately 1 megabyte. Since the block size is limited to 1
megabyte , there can be no more than approximately 2000 transactions per
block(blockchain.info). Below is a graph which simply explains how Bitcoin transactions and the (Bitcoin) block chain work. The transactions fees that miners earn , ensures that miners will keep the network in place even when all the 21 million coins are mined, this will be the case in approximately 2133(blockchain.info) Since the miners control whether a transaction is real or fake , the middleman (financial intuitions) are no longer needed. The block chain solves the trust issue that rises when people pay with money, without having to trust a financial institution.
9 Source: steemit website (2017)
The graph above simply explains how a Bitcoin transaction works. Person A sends some Bitcoins to person B . The transaction gets a specific hash ( payment hash) , with this hash you can search your transaction on blockchain.info or a similar website that tracks the bitcoin blockchain, so you can always follow your transaction. If the transaction is confirmed by one miner it is irreversible ,the transaction has taken place if its confirmed by six blocks, after that the transaction has been finalized (Nakamoto, 2008) .
3.3 Price history / volatility of Bitcoin
Since the introduction of Bitcoin in 2008 , investors find it difficult to give a value to Bitcoin. In the early years blockchain /bitcoin where new phenomena so it was unclear what impact it could have. But recently everyone seems to talk about blockchain and its consequences for companies , the food and medicine industry for example , can trace every product from creation to customer (Hoy, 2017).
10 The following graph shows the bitcoin price between 2008-2016
Source: Bitcoincharts website (2017)
The most remarkable point of this graph is the sharp decline in 2014. This sharp decline was the consequence of the Mt. Gox hack. During the Mt. Gox hack 80 percent of the worldwide bitcoin trade was executed on the Mt. Gox exchange. Mt. Gox was a Japanese bitcoin exchange that processed nearly 80 percent of Bitcoin trades worldwide(Trautman, 2014). People who traded Bitcoin in 2014 knew that wallets could be hacked , but a hack as big as Mt. Gox was not executed before. During the hack approximately 750,000 bitcoins Bitcoins were stolen and the results was a loss of trust in the Bitcoin exchanges. Especially because almost all bitcoins at that moment in time were traded on Mt. Gox (Trautman , 2014) . Today the bitcoin trading is a bit more differentiated , recent hacks tether hack for example , did not have a significant impact on the Bitcoin price(Chaudhurry, 2017). Exchanges have increased their security and almost all coins on an exchanges are stored in so called cold wallets. Cold wallets are wallets which are not directly accessible for hackers , because there are not always online , some of the funds of exchanges need to be on hot wallets so
customers can trade their tokens/coins. In general cold wallets are disconnected from the internet and hot wallets are constantly connected to the internet(Ledgerwallet). This
constant connection to the internet leaves hot wallets vulnerable for attacks. (Ledgerwallet) Private customers can store their coins in cold wallets with a ledger nano s for example. A ledger nano s creates a 24 word password phrase that is showed only one time during the first start-up of the ledger nano s. After that is impossible to ever see the 24 word
passphrase ever again (Ledgerwallet).
2017 has been a completely different years compared to the years 2008-2016, Bitcoin became mainstream in 2017. The increased interest in blockchain/bitcoin led to a price explosion of bitcoin in the end of 2017( and the entire cryptocurrency
11 Source: bitcoinchairts website (2017)
Prices are taken from the biggest fiat to crypto exchange at the moment (excluding south-Korea) , GDAX ( a company owned by coinbase).
This is the google trend line of Bitcoin in 2017.
Source: google trends website (2017)
Both graphs shown a big burst in the interest of Bitcoin. One could say that the story of Bitcoin / cryptocurrencies has reached the average audience and regular investors in late November of 2017.
The start of future trading on Bitcoin , seems to have an effect on the trustworthy of Bitcoin. Bitcoin future trading started on the 17st of December 2017, CME was the first to offer such futures. The rumour of future trading were already starting in October this could led to the bull run of bitcoin we saw in November and especially December (Acheson, 2017) . The introduction of futures to Bitcoin is another step to bitcoin as an mature Asset . Bitcoin is no longer only for early adopters, people that invested because they believed bitcoin would change our financial system. But rather it’s becoming a financial asset to speculate with. Although many see futures as a very positive development for Bitcoin (associated press, 2017).
12 The trading of futures comes with a cost. CME will briefly pause bitcoin futures trading if the contracts rise with 7 percent or fall with 13 percent , and prices will not be allowed to move more than 20 percent (Urban, Russo, Louis, 2017). A lot of other futures trading platforms wait until they think the Bitcoin market is less volatile and more mature. TD Ameritrade for example has a lot of customers who wants to invests in Bitcoin , but they think the market is not mature enough and is too volatile. On top of that there are also legal issues at the moment and many governments haven’t clearly stated their opinion on Bitcoin. TD Ameritrade tries to educate their investors about Bitcoin and cryptocurrencies (urban , 2017). The banks and brokers who offer bitcoin trading are cautious and demand collateral equal to 100 percent of the value of trades. It’s not uncommon for brokerage to ask such high requirements , especially if an asset is very volatile. On the first day of Bitcoin future trading a margin of 50 percent for long term investments was asked and about 240 percent for short selling(Urban , Russo, Louis, 2017).
3.4 Bitcoin energy footprint
Source: bitcoinenergyconsumption website (2017)
Above you can see a graph of the bitcoin energy usage. The total energy usage of Bitcoin ( including all hard forks) is calculated by the estimated total mining revenues ,multiplied by the estimated percentage that is spent on electricity (today that’s around 60
percent)(bitcoinenergyconsumption). Then the average kwh cost is looked up , and then the total cost of mining is divided by kwh price. To put in a better perspective let’s compare the total bitcoin energy consumption to the yearly consumption of countries.
13 Source: bitcoinenergyconsumption website (2017)
This graph shows the Bitcoin energy consumption compared to the energy consumption of countries(bitcoinenergyconsumption). Recently there has been a lot of criticism on the proof of work base of Bitcoin and many new altcoins switch to a proof of stake coin , which doesn’t require 24/7 calculations by computers to confirm transactions. On the other hand the high energy usage is not caused by Bitcoin parse, because bitcoin transaction could be run on one computer , because the difficulty would automatically adjust. But since the bitcoin price is so high at the moment , the miners in especially countries with low cost energy profit a lot of mining Bitcoins and that’s problem the biggest problem for Bitcoin. The bitcoin network is powered by machines in second or third world countries where energy is cheap , and we know that energy in those countries is generally coal-fired
powered plants , especially in China(M. Zhang, H. Mu, Y. Ning, Y. Song, 2009). So that’s puts a massive energy footprint on the entire bitcoin network. This can be solved by new altcoins , which turn to proof of stake coins which don’t require hashing power of computers.
Another positive development is that a lot of altcoins are run on the ethereum network , so called erc20 tokens. This solves the problem that new altcoins needs to be mined, which would lead to even higher energy consumption by cryptocurrencies(Bansal, 2017).
14 Hypothesis and Methodology
4.1 Hypothesis
Bitcoin is a good diversifier against movements in the other asset if B1, B2, B3 are zero. A zero beta means an asset has zero systematic risk. Essentially that means that an asset with a zero beta would have the same expected return as the risk free interest rate. Furthermore a zero beta implies zero correlation with the chosen market . Bitcoin is a weak hedge /safe heaven against movements in the other asset if B1 , B2 , B3 is higher than one . A beta higher than one indicates that an asset is more volatile than the chosen market. So the expected returns of the asset are higher , but in return the asset is also more volatile than the market. For a hedge / safe heaven this is not a preferred beta , because a high beta means an asset is more prone to movements in the stock market/ general news about the economy. Bitcoin is a strong hedge when B1, B2, B3 is negative. A negative beta is the perfect beta for a hedge/ safe heaven , this would imply that an asset has a negative correlation with the market. So if the market declines the assets value increases, that’s perfect for a hedge/ safe heaven(Berk, DeMarzo , 2014) Gold for example has a negative beta compared to DAX30, Nikkei 225, S&P 500 indexes(Capie et all, 2005 ).
4.2 Method
Bouri et all (2017) found that the dynamic conditional correlation model is the best GARCH model to use to analyse whether Bitcoin is a diversifier , a hedge or a safe haven. I decided to use the CAPM model , since it’s a lot easier to use and essentially grasps the same idea. With the CAPM model I test whether the beta of Bitcoin is higher or lower than the markets , S&P500 , Nikkei , DAX30. I will compare the beta’s of Bitcoin against the beta’s of Gold , since gold has been a proven safe haven and hedge for a while now. The corresponding data for the indexes, Nikkei 225, DAX30, S&P 500, will be gathered from Datastream. The chosen timespan will be 1st of January 2013 until 1st of January 2018, in total five years. I will
calculate a beta with timespan 5 years, but since the recent price surge of bitcoin I will also compare the daily returns of bitcoin and gold and the chosen indexes , from 1st of January
2016 till 1st of January 2017. The data of Bitcoin will be gathered from Datastream. Daily
returns of the markets will be used. The number of data points for Bitcoin is 1463. The number of data points for the indexes is less because they are closed on Saturday and Sunday. Respectively the data points for the Nikkei 225, DAX30, S&P 500 are 984, 1015, 1008. For all data closing prices will be used to calculate returns. For the chosen indexes the total returns are taken from Datastream , the total returns also include paid dividends. In addition the daily returns of Bitcoin and Gold will be compared and also the daily returns of the indexes will be looked at.
The regression equation will be the following :
rt−rt,f =α+βmkt(rt,mkt−rt,f)
The beta measures the volatility of the asset compared to the chosen market. For example if we choose Bitcoin as an asset and the beta of bitcoin is one. That would mean Bitcoin has
15 perfect correlation with the market , so if the market rises with one percent bitcoin rises with one percent. Since daily return data is used and the yearly risk free interest rates are very low , the daily rates are approximately equal to zero. The expected beta if Gold will be around zero or negative , since in earlier literature about Gold it has been shown that the Gold price moves separate from market indexes. For Bitcoin on the other hand there is no clear sign whether Bitcoin moves separate from market indexes, the literature indicates that’s it’s likely that Bitcoin moves reverse from regular markets since it’s not affected by macroeconomic fundamentals (Bouoiyour , Selmi, 2015).
16 Data
First we will look at the daily returns of Bitcoin and gold. As expected Bitcoin is a lot more volatile than Gold, some outliers are not included in the graph since the outliers are well above or below the average. The graph above shows the daily returns of Bitcoin and gold. As can be seen Bitcoin has had several periods of high volatility, especially the beginning of January 2013 and January 2017. January general is a difficult month for Bitcoin , some theories suggest that Chinese new year has a significant impact on the declining bitcoin price in January (Williams-Grutt, 2018). Gold in return has been relative stable the entire period of time. This stability of Gold seems perfect for a hedge or safe heaven usage. Based on this graph Bitcoin is not a good safe heaven since its daily returns are highly volatile , returns of 10 % or – 10 % are not uncommon for Bitcoin. Investors that look for a safe heaven , don’t want to wake up with loss in their safe haven invest of – 10 percent or more.
-30% -20% -10% 0% 10% 20% 30% 01/01/2013 01/01/2014 01/01/2015 01/01/2016 01/01/2017 01/01/2018 % d aily r etu rn D/M/Y
Daily returns Bitcoin and Gold
17 Now we will look at a return graph of specifically gold versus DAX30, S&P500 and Nikkei 225.
If we look at the movements of daily returns of Gold versus the markets , we can see that Gold is even less volatile than the chosen market indexes. For instance if we look at some of the peaks of the market indexes, the daily return of gold remains stable around 2 or -2 percent. Gold doesn’t seem to be influenced by news about the indexes and this statement is further probed by the beta of gold versus the markets , which can be seen on the next page.
Now we will look at the daily returns graph of Bitcoin versus S&P500 , DAX30, Nikkei 225. -6% -4% -2% 0% 2% 4% 6% 01/01/2013 01/01/2014 01/01/2015 01/01/2016 01/01/2017 01/01/2018 % d aily r etu rn D/M/Y
Daily returns Gold, S&P500, Nikkei 225, DAX
18 As expected the daily returns of Bitcoin are a lot more volatile than the returns of the
chosen indexes. It’s not uncommon for Bitcoin to have daily returns between -10 % and 10 % percent. I picked some outliers of the graph and looked if there was specific news that influenced the price of Bitcoin. And indeed the large outliers are all caused by good or bad news about Bitcoin itself , and not about news of the global economy. For instance the last massive price drop of Bitcoin was caused by the ban of Ico’s in China and the banning of Chinese exchanges( Sulleyman, 2018). And even more recent the enormous price drop of the entire crypto market, around 35 % market cap drop , was caused by the Korean government which temporarily banned moving fiat to exchanges , and they also banned ICO’s earlier this year(Ramirez, 2018) . The interesting part is that Bitcoin news doesn’t affect the regular indexes , like S&P500 and other indexes. This paves the way for Bitcoin as a hedge , because the bitcoin price is determined solely on its own news. We will now look at the beta’s of Bitcoin and Gold.
Beta bitcoin S&P 500 (B1) Beta bitcoin Nikkei 225 (B2) Beta bitcoin DAX30 (B3) 0.084988413 -0.338805566 -0.214025434 Beta gold S&P 500 Beta gold Nikkei Beta gold DAX30 -0.103240761 -0.095825575 -0.181862904
As expected the beta’s of Gold are all negative . The price of gold doesn’t positively correlate with the chosen indexes, which makes it perfect for a hedge , on the other hand gold is also a good safe heaven since its price doesn’t fluctuate too much , as we have seen earlier in graph on page 17.
-25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 01/01/2013 01/01/2014 01/01/2015 01/01/2016 01/01/2017 01/01/2018 % d aily r etu rn D/m/y
Daily returns Bitcoin, S&P500, Nikkei 225, DAX
19 What’s even more interesting is the beta of bitcoin vs the Nikkei 225 and DAX30. Both beta’s are more negative than their Gold counterparts. On the other hand bitcoin’s beta against the S&P500 is positive , So what do this beta’s mean. In a declining market , so DAX30 , Nikkei and S&P500 go down , the gold price move upwards and so does Bitcoin, with the expectation of S&P500. The negative beta’s of bitcoin imply a negative correlation with the market. So a rise in the stock price of the markets results in a decline of the Bitcoin price. For the investor in Nikkei and DAX30 , bitcoin seems a good diversifier in their
portfolio , since both beta’s are very negative. It’s a different story for investors of S&P500 , the beta is not negative , but it’s close to zero so it seems also a good diversifier for their portfolio. While the beta’s of Bitcoin are negative or close to zero , it is not a good usage for a safe haven at this moment in time. As we saw earlier Bitcoin’s daily return fluctuate much , daily returns of -10 % and 10 % are not uncommon, another risk of Bitcoin is that your funds can get stolen . So at this moment in time Bitcoin is too volatile to be used as a safe haven on top of that there is no guarantee of a refund if your Bitcoins get stolen.
P value Bitcoin S&P500 P value Bitcoin Nikkei 225 P value Bitcoin DAX30 0.766876084 0.029368997 0.261096619 P value Gold S&P500 P value Gold Nikkei 225 P value Gold DAX30 0.004457296 1.1169E-06 2.92969E-14
If we test with an a value of 0.05 , all p values of gold are significant. The p values of gold are all very significant , Bitcoin on the other hand has only one significant p value and that is the p value of Nikkei 225.
20 Conclusion
5.1 CAPM results
The beta’s of gold are significant negative , this means that gold is a good hedge against the chosen indexes. Gold is also a good safe haven if we look at the daily returns, there are not big outliers and the value of gold is relatively stable.
The beta of bitcoin versus DAX30 and Nikkei 225 is both very negative, but the beta of bitcoin vs DAX30 is not significant , hence we cannot conclude that Bitcoin is a good hedge against the DAX30. But the beta of bitcoin versus the Nikkei 225 is significant negative, and it seems even a better hedge in the time period that is studied , 2013-2017.
5.2 debate
Bitcoins value will be volatile until governments have made clear what their position regarding Bitcoin is. Recently the South-Korean government has given a good example of what adopting regulation can mean. The question is what will the European and United states regulators do.
5.3 recommendations
For further studies I recommend looking at the daily returns when there is a global financial crisis. Can bitcoin be a safe haven if there is a global financial crisis. Because in this short study bitcoin doesn’t seem to be effected by news about the global economy, but does this effect persist when there is a global financial crisis. Furthermore what is the effect of the recent regulations on the price of Bitcoin. Another interesting research would be if Bitcoin serves as a safe haven within the cryptocurrency market.
21 References
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