Bitcoin, similar to gold, is a good hedge against global uncertainties like trade wars.
That’s according to a lengthy working paper out from the Department of Economics of the University of Pretoria, “Is Bitcoin the New Digital Gold? Evidence From Extreme Price Movements In Financial Markets.”
The paper tests a popular claim in the media that Bitcoin has joined the ranks of safe-haven assets. These are assets where investors place their cash at the time of growing global uncertainties, as they flee risky assets like stocks.
US Treasuries, gold, and the Swiss Franc have been considered safe-haven assets.
Now come Gkillas Konstantinos and François Longin, the authors of the paper, to confirm this assertion by using the multivariate extreme value theory.
That’s the appropriate statistical framework to model the tail dependence structure of the return distribution.
What did they find? Two things.
First, they confirmed the findings of previous studies — “that the correlation of extreme returns increases during stock market crashes and decreases during stock market booms.”
Second, they confirmed Bitcoin is a hedge against turbulent times.
“By combining each equity market with bitcoin, we find that the correlation of extreme returns sharply decreases during both market booms and crashes, indicating that bitcoin could provide the sought-after benefits of diversification during turbulent times,” say the authors. “A similar result is obtained for gold, confirming its well-recognized status as a safe haven when a crisis occurs. Finally, we find a low extreme correlation between bitcoin and gold, which implies that both assets can be used together in times of turbulence in financial markets to protect equity positions.”
Still, Jim Powers, Director of Investment Research at Delegate Advisors, isn’t convinced.
“Bitcoin is not the new gold because the old gold (i.e., gold) still works just fine,” he says. “While similarities exist between gold and Bitcoin (e.g., store of value, price determined by supply and demand), gold has been recognized as a store of value for millennia. Bitcoin has been recognized as a store of value for less than a decade.”
Then there’s Bitcoin’s reliance on the Internet. “In an end-of-the-world-style financial apocalypse, individuals can still hold and trade physical gold,” adds Powers. “Try buying a loaf of bread with Bitcoin if the Internet stops working.”