The Impact of COVID-19 on Cryptocurrency: The Hedging Behaviour of Bitcoin

Abstract

Cryptocurrencies have several features that set them aside from traditional currencies. In terms of market capitalization, the top five cryptocurrencies are considered for the analysis to strengthen the research's validation. The most successful crypto asset, being Bitcoin, possesses several characteristics that pose advantages and disadvantages in the financial markets. Digital convenience ensures the safety and ease of use for Bitcoin users, while decentralization also poses a primary benefit. Extreme volatility and the impact of negative externalities on the value of Bitcoin contribute to the assessment of Bitcoin trends in the market. The recent outbreak of the coronavirus (COVID-19) has shown evidence of influencing Bitcoin prices as the virus is spread across continents, leaving the global financial environment in turmoil. The classification of Bitcoin as a hedge is dependent on various factors, including global economic uncertainty. The extent to which the coronavirus impacts cryptocurrencies' hedging capabilities, especially that of Bitcoin’s, is of particular interest during the 2020 pandemic. Analyzing the literature on the influence of crisis on Bitcoin movement will explain why COVID-19 has had such a significant impact on the global financial markets, especially that of cryptocurrencies. The performance of Bitcoin, Ethereum, XRP, Tether, and Bitcoin Cash is compared to that of seven factors including commodities and indices: gold, USD, S&P 500 index, SSE index, world and emerging markets MSCI indices, and Economic Uncertainty, to better understand the hedging capabilities throughout the time of the crisis. This is done using four different multivariate GARCH specifications that account for the nature of the interaction between the cryptocurrencies and the financial variables. Although previous research finds that Bitcoin should act as a hedge during times of economic turmoil, the performance observed during COVID-19 suggests otherwise.