Bitcoin Is Not the New Gold: A Comparison of Volatility, Correlation, and Portfolio Performance

29 Pages Posted: 22 Mar 2018 Last revised: 13 Jun 2019

See all articles by Tony Klein

Tony Klein

Queen's University Belfast - Queen's Management School

Pham Thu Hien

Humboldt University of Berlin

Thomas Walther

Utrecht University - School of Economics

Date Written: March 22, 2018

Abstract

Cryptocurrencies such as Bitcoin are establishing themselves as an investment asset and are often named the New Gold. This study, however, shows that the two assets could barely be more different. Firstly, we analyze and compare conditional variance properties of Bitcoin and Gold as well as other assets and nd differences in their structure. Secondly, we implement a BEKK-GARCH model to estimate time-varying conditional correlations. Gold plays an important role in financial markets with flight-to-quality in times of market distress. Our results show that Bitcoin behaves as the exact opposite and it positively correlates with downward markets. Lastly, we analyze the properties of Bitcoin as portfolio component and nd no evidence for hedging capabilities. We conclude that Bitcoin and Gold feature fundamentally different properties as assets and linkages to equity markets. Our results hold for the broad cryptocurrency index CRIX. As of now, Bitcoin does not reflect any distinctive properties of Gold other than asymmetric response in variance.

Keywords: BEKK, Bitcoin, CRIX, Cryptocurrency, Gold, GARCH, Conditional Correlation, Asymmetry, Long Memory

JEL Classification: C10, C58, G11

Suggested Citation

Klein, Tony and Hien, Pham Thu and Walther, Thomas, Bitcoin Is Not the New Gold: A Comparison of Volatility, Correlation, and Portfolio Performance (March 22, 2018). International Review of Financial Analysis, Vol. 59, pp. 105-116; University of St.Gallen, School of Finance Research Paper No. 2018/14; QMS Research Paper 2018/01. Available at SSRN: https://ssrn.com/abstract=3146845 or http://dx.doi.org/10.2139/ssrn.3146845

Tony Klein (Contact Author)

Queen's University Belfast - Queen's Management School ( email )

Riddel Hall
185 Stranmillis Road
Belfast, BT9 5EE
United Kingdom

HOME PAGE: http://www.tony-klein.info

Pham Thu Hien

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, AK Berlin 10099
Germany

Thomas Walther

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

HOME PAGE: http://www.thomas-walther.info

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