Bitcoin Hedge, Diversifier or Safe Haven? A comparison with Gold

Abstract

This study investigates whether Bitcoin acts as a hedge, diversifier or safe-haven to extreme price movements of Crude oil (measured by WTI) especially during COVID-19. The data of spot prices have been obtained from 2014-2021 from St. Louis FRED DataStream. This study employs the Dynamic Conditional Correlation (DCC) GARCH model and forecasts the future trend by applying VAR and ARIMA models. The models forecast, within and out of sample, then the findings have been compared to find more accurate results. Mirroring the role of Bitcoin, hedge, diversifier or a safe haven, is worthwhile for the investors to hedge the risk during financial uncertainties. The results reveal that Bitcoin acts as a diversifier and not as a safe haven. These findings are helpful for the investors, government, and regulators of financial markets. This paper contributes to an existing debate on the useful inclusion of Bitcoin in a portfolio and diversifies the risk.

Keywords: Hedge, Safe-haven, Diversifier, DCC-GARCH, VAR, ARIMA