Bitcoin: An inflation hedge but not a safe haven
1School of Economics, Yonsei University, 50 Yonsei-ro, Seodaemun-gu, Seoul 03722, South Korea.
Finance Research Letters
|April 18, 2022
Summary
Bitcoin hedges against inflation but is not a safe haven asset like gold. Its price reacts differently to financial versus policy uncertainty, showing unique market dynamics.
Area of Science:
- Economics
- Financial Markets
- Cryptocurrency Analysis
Background:
- The COVID-19 pandemic highlighted similarities between Bitcoin and gold, prompting investigation into Bitcoin's potential as an inflation hedge and safe haven.
- Understanding Bitcoin's price drivers is crucial for investors and policymakers navigating volatile economic conditions.
Purpose of the Study:
- To systematically examine the relationship between inflation, economic uncertainty, and Bitcoin and gold prices.
- To assess Bitcoin's efficacy as an inflation hedge and a safe haven asset compared to gold.
Main Methods:
- Estimation of a Vector Autoregression (VAR) model to analyze price dynamics.
- Analysis of shocks related to inflation, financial uncertainty, and policy uncertainty.
Main Results:
- Bitcoin demonstrates an appreciation against inflation shocks, supporting its inflation-hedging claims.
- Bitcoin prices decrease in response to financial uncertainty, unlike gold, thus rejecting its safe-haven status.
- Bitcoin prices remain unaffected by policy uncertainty shocks, suggesting independence from governmental actions.
- Asymmetric drivers influence Bitcoin's price dynamics in bullish versus bearish markets.
Conclusions:
- Bitcoin functions as an inflation hedge but not a safe haven asset.
- Bitcoin exhibits distinct responses to financial and policy uncertainty compared to gold.
- The findings are robust, holding true both with and without the COVID-19 pandemic period.
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