In this study, we examine the perception of Bitcoin as a financial asset and explore its potential as a future currency, a store of value comparable to gold and an investment alternative.
To this end, we employ a Conditional Autoregressive Value at Risk (CAViaR) model with an asymmetric slope specification on various financial assets such as Bitcoin, gold, traditional currencies (US Dollar Index, USD/GBP exchange rate) and stock market indices (Dow Jones, S&), for the period from September 2017 to September 2022.
By examining tail dependence, we assume that Bitcoin behaves like Gold and USD in the context of extreme market events, which diminishes its potential for diversification. Our findings show that Bitcoin exhibits divergence in terms of its response to negative returns. The relationship between Bitcoin and gold, coupled with Bitcoin’s distinct response to unfavorable market events, indicates that it does not consistently exhibit the same safe haven attributes as gold. This unique reaction to negative chocs refutes its viability as a safe heaven, currency and investment substitute. While Bitcoin has some currency/gold-like properties, it diverges significantly from an investment asset (stock index).
Our results challenge the simplistic portrayal of Bitcoin as a direct replacement for gold and traditional currencies. The findings provide investors with a better understanding of the nature of Bitcoin’s tail risk and its limitations as a diversifier, safe haven and substitute for traditional assets like gold and currencies.
Our findings suggest that portfolio managers should avoid treating Bitcoin as a substitute for gold or a reliable safe haven, as it lacks diversification benefits during crises. Policymakers should address Bitcoin’s speculative nature by reducing its volatility and stabilizing prices through targeted regulations. Economies relying on Bitcoin for transactions are discouraged from doing so in its current state. Theoretically, our results impact behavioral finance by highlighting Bitcoin’s speculative traits and limited safe-haven status, which affect investor perceptions and intentions, undermining confidence in its ability to protect portfolios during market downturns.
The study challenges Bitcoin’s role as a safe haven or currency, impacting investor perceptions and financial decision-making. Its speculative nature and response to market shocks suggest limitations as a stable investment or medium of exchange. This has broader implications for financial inclusion, regulation and cryptocurrency adoption. Policymakers may need to reassess Bitcoin’s integration into financial systems, addressing associated risks. Additionally, public perception may shift, reinforcing Bitcoin’s volatility rather than its reliability as a store of value. These insights contribute to the ongoing debate on digital assets' economic and regulatory frameworks.
The empirical findings of our research largely validate the speculative function of Bitcoin. Unlike previous studies, the present investigation provides an extensive analysis of Bitcoin’s features.
