Bitcoin a Hedge, Diversifier, or Safe Haven for Energy Commodities?

Unlike fiat, bitcoin has emerged as the world’s first fully decentralized currency that relies on a highly sophisticated network protocol. The logarithmic growth rate of bitcoin’s market capital has recently climaxed and bitcoin’s price recorded its all time high of $1350 a few days ago. The skyrocketing popularity of bitcoin has urged researchers and economists to start assessing the financial aspect of bitcoin.

Along a recently published paper, a group of researchers studied the link between bitcoin and commodities by testing the ability of bitcoin to act as a hedge, a diversifier, or even as a safe haven against the volatility of commodities and particularly against energy commodities. Given the fact that energy, i.e. electricity, represents an essential element in bitcoin mining, the cost of electricity is the only cost variable that can influence the price of bitcoin. The authors of the paper used data from July 18th, 2010 all the way down to December 28th, 2015 and also accounted for the unprecedented bitcoin price crash that took place in December 2013, which led to some interesting results.

The analysis performed by the researchers pointed to the fact that bitcoin possessed hedge and safe haven properties for both of the general commodity index and the energy commodity index all through the aforementioned period and the pre-crash period. During the period that followed the crash of December 2013, bitcoin acted as a diversifier for both commodity indices. To confirm that these findings were mostly influenced by the energy commodity index, the researchers considered the non-energy commodity index and the yielded results showed that when considering non-energy commodities, bitcoin can only act as a diversifier, regardless of the sampling time period.

From a wider perspective, the rather weak relationship linking bitcoin to non-energy commodities, energy commodities or commodities as a whole, could mean that the world’s biggest conventional investors still do not consider bitcoin an investment opportunity.

On the other hand, the results denote that bitcoin’s hedge and safe have features are different throughout the two sampling periods and also in extreme upward and downward movements in the return distribution. This means that bitcoin’s crash in December 2013 has catalyzed conformational changes in the dynamics that govern the relationship between bitcoin and energy commodities. This goes hand in hand with the researchers’ intuition that a direct relationship can most probably be found during periods of bitcoin price decline. These new findings can be utilized by investors and policy makers to formulate better investment decisions.

Even though the findings of this research paper are important to investors, it is worth mentioning that one should be cautious regarding the liquidity of bitcoin. When comparing it to traditional assets, bitcoin is much less liquid and somehow of limited accessibility to retail investors. Nevertheless, this can boost the possibility of creation of bitcoin derivatives, especially that the US Commodity Futures Trading Commission’s has decided to consider bitcoin a “commodity”. Definitely, this will ignite a plethora of researches on bitcoin and its potential financial derivatives.

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