The Rise of Cryptocurrencies as an Investment Hedge. The Shift from Traditional Investment Hedges: Can Cryptocurrencies Replace Bonds as an Investment Hedge?

Abstract: This thesis uses a dynamic conditional correlation (DCC) model to investigate the correlation between major cryptocurrencies, US government bonds and the S&P 500 and MSCI World indices in order to establish the hedge, safe haven and diversifier properties of cryptocurrencies. While US Treasuries have exhibited negative correlation and hedging properties against equity risk for decades, recent extreme market conditions have caused investors to look for alternative asset classes for hedging. Having experienced rapid market growth and increasing investor interest in the past few years, cryptocurrencies could provide a solution to hedging for when bonds are no longer able to protect against equity risk. Our empirical results, however, indicate that at present cryptocurrencies should only be considered as a complement rather than a substitute to bonds in an investment portfolio. While certain cryptocurrencies showed some hedging capabilities, most cryptocurrencies examined in this study only exhibited diversifier benefits. Although cryptocurrencies are therefore unlikely to fully replace bonds as a hedge at present, cryptocurrencies are a relatively new asset class with a demonstrated capability for growth and resilience, indicating immense potential for future development, especially in light of the creation of a new decentralized financial system and its impact on the economy in the years to follow.