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Even though bitcoin was first innovated to provide a peer-to-peer (P2P) payment system, it has currently emerged as an investment tool, as more and more investors and speculators are storing bitcoin aiming at boosting its scarcity and driving its price to higher levels. Bitcoin price rose from less than $1 in April, 2011, to $2,400 at the time of writing of this article. Even more, bitcoin price exceeded $3,000 in June, 2017, recording a market capital of around $47 billion back then.
Apart from its logarithmic price rise, bitcoin has exhibited powerful resilience throughout periods of financial stress, denoting its potential to become a useful hedge against global financial stress. Throughout the paper published by Bouri and colleagues in 2017, they argued that the global financial uncertainty that followed the global financial crisis in 2008, catalyzed the emergence of bitcoin , not only as an investment asset, but also as an alternative currency to traditional economies. Essentially, later periods of financial stress, e.g. Europe’s sovereign debt crisis (2010-2013) and Cyprus’s banking crisis (2012-2013), have further facilitated bitcoin usage as a safe haven from sovereign economic risks.
A paper published by Luther and Salter in 2017 showed that the popularity of bitcoin skyrocketed following Cyprus’s announcement that the country would accept a bailout on the 16th of March, 2013. Increased popularity of bitcoin was also observed in countries including Spain and Greece, whose retail banks are troubled. Many studies have shown the inestimable role of bitcoin as an investment asset and have also highlighted how adding bitcoin can boost the diversification benefits of an equity portfolio. In 2015, Briere and colleagues performed a study that analyzed weekly data between 2010 and 2013, and emphasized the low correlation of bitcoin with conventional investment assets (bonds, stock and hard currencies), as well as alternative investment tools (hedge funds, commodities, real estate). They noted the pivotal diversification benefits of bitcoin, apart from its considerably high return and volatility. They also found out that bitcoin can be used a hedge against stress across Chinese and Asian Pacific stock.
In 2017, Bouri and colleagues proved that bitcoin is a safe haven against equities and also noted that there is a negative correlation between bitcoin and the US VIX. They examined bitcoin’s hedging power against global financial uncertaintry, as estimated via the VIXs of emerging and developing markets. Bitcoin returns were decomposed into different frequencies and then quantile-on-quantile regressions were applied, which helped the authors prove that bitcoin is a safe hedge against global financial uncertainty, especially when short investment periods are considered.