What is the level of correlation between the returns of classic investment assets and those of Bitcoin?

Abstract

This paper aims to study the dynamic linkages between the returns of classic investment assets and those of Bitcoin. For this, we first based our research on understanding the emergence of cryptocurrencies, in particular Bitcoin, their functioning and the implications for regulators. We also discussed the trading system and platforms. Then, our literature review allowed us to notice that a certain number of studies had been carried out, based on various models such as GARCH and covering most of the periods used in this work. However,we note some grey areas, especially regarding more recent events that are not yet fully covered. On this basis, we chose to follow the methodology explored in the article of Wang and al. (2022) by using an ADCC-GARCH model that captures the effect of asymmetric time-varying conditional correlations between different assets. We were thus able to analyse the dynamic linkages between Bitcoin and assets. Our results show the following elements: • Bitcoin-Bonds and Bitcoin-EUR/USD exchange rate linkages exhibit a negative trend for dynamic correlation coefficients • Bitcoin is more of a risky asset, closer to stocks • Shot-term volatility influence the dynamic linkages between Bitcoin and all assets involved in this paper • Extreme shocks tend to reinforce Bitcoin-Stocks, Bitcoin-Gold and Bitcoin-EUR/USD exchange rate dynamic linkages Then, we discussed on the role of Bitcoin in portfolios as well as its characteristics as a diversifier, hedging strategy or safe haven asset. We performed a multiple linear regression analysis to assess these properties, but we found that it was not relevant enough regarding our database. So, we went back to the dynamic correlation coefficients of our ADCC-GARCH model. This allows us to add to our previous conclusions that Bitcoin shows hedging properties regarding US Treasury Bonds and EUR/USD exchange rate but should be associated with other assets for accurate hedging strategies. Finally, this paper expands scientific research by exploring the dynamic linkages between Bitcoin and assets, while assessing Bitcoin's properties as a risk diversifier, hedging tool and safe haven asset. For future research, we suggest using other models to diversify the approaches, especially for Bitcoin’s properties tests.