New Market Risk And Bitcoin Returns Report Says BTC Investment May Not Be Best Stock Market Hedge
Investing In Bitcoin Might Not Be The Best Asset To Be A Stock Market Hedge
Even though many crypto fanatics believe that Bitcoin might be the best asset against the stock market, this might not be necessarily true. This is according to a paper titled “Market and Bitcoin Return” authored by Dimitrios Koutmos.
His research proposes the crypto may have restricted value as a hedge as it's exposed to similar constituents that move the prices of stocks and other mainstream investments. While it escapes some of those drivers when its price is especially volatile, the increased risk may outweigh the greater returns.
What Is A Hedge?
You have probably heard the term “hedge your bets,” which, under one definition, means to make smaller bets on different outcomes in case your large bet does not work out. Hedging in the stock market works the same way. You set up strategies or buy securities in case your stock market investments go down in value instead of up. Hedging protects against potential losses if speculation does not work.
In a way, hedging is the insurance that helps the investor to lessen their losses, but it does not prevent the negative things happening in the course of life or business.
Bitcoin A Bad Stock Market Hedge
The released by Dimitrios cautions that Bitcoin prices, despite their seemingly attractive independent behavior relative to economic variables, may still be exposed to the same types of market risks which afflict the performance of conventional financial assets.
He used a Markov regime-switching model to distinguish between regimes of high and low Bitcoin price volatility to show that while returns on the aggregate market portfolio cannot explain Bitcoin returns, other asset pricing risk factors, such as interest rates and implied stock market and foreign exchange market volatilities, are important determinants of Bitcoin returns.
The abstract of the paper concludes by saying:
“Distinguishing between periods of high and low Bitcoin price volatility reveals heterogeneity in the explanatory power of market risk factors; in particular, Bitcoin returns are more difficult to explain during periods of high volatility relative to periods with low volatility. This finding can partially explain why extant studies, which neglect to distinguish between exchange rate regimes in Bitcoin, have difficulty linking Bitcoin prices to economic fundamentals.”