This study aims to examine how cryptocurrency returns – specifically Bitcoin, Cardano and Tether – respond to unexpected shocks in inflation and interest rates and assess their potential as hedge, safe-haven or diversifier assets against them, comparing them to gold, the traditional safe-haven asset.
The research spans two sub-periods (2019–2021 with stable interest rates and 2022–2024 with rising rates) and uses quantile regression to capture the distribution of returns across market conditions.
The main findings of this study reveal that, first, Tether shows a consistently negative and statistically significant relationship with both nominal and real interest rates during bull markets, evidencing Tether’s role as a hedge asset against interest rates. Second, Tether together with Cardano throughout the full period and the second sub-period of interest rate hikes, as well as with Bitcoin during the first sub-period could be taken into account by investors to diversify nominal interest rate risk. Third, gold consistently shows a positive and statistically significant relationship with shocks in inflation expectations during economic recessions, suggesting its role as a hedge or even a safe-haven against inflation. Fourth, Bitcoin emerges as a potential safe-haven against inflation in the second subperiod, characterised by an upward trajectory in interest rates and driven in part by inflationary pressures arising from the Russia–Ukraine conflict.
Future research could explore the impact of government regulation on the adoption and performance of cryptocurrencies, as well as the relationship between cryptocurrencies and other financial markets. Investigating the behavioural aspects of cryptocurrency investors, the environmental impact of green cryptocurrencies and the adoption of cryptocurrencies in emerging markets are also promising areas of research.
The results underscore the diverse responses of cryptocurrencies to macroeconomic factors, highlighting their role as a portfolio diversifier, hedge or safe-haven asset and suggesting further research into regulatory implications. Therefore, our findings have significant economic implications, particularly for portfolio management and investment strategies. The study shows that including a mix of traditional, green and stable cryptocurrencies can improve portfolio diversification and mitigate risks associated with interest rate and inflation fluctuations.
This research can provide valuable insights for investors and policymakers, helping them to better understand and manage cryptocurrency investments. Policymakers can use our findings to develop regulations that support the adoption of cryptocurrencies while mitigating legal and operational risks. For example, understanding the different roles of different types of cryptocurrencies in hedging against economic variables can inform regulatory decisions that promote financial stability and protect investors. In addition, our study highlights the importance of educating retail investors on the benefits of diversifying their holdings with a mix of cryptocurrencies and traditional assets such as gold. Financial analysts and market participants can use these insights to provide better market analysis and educational resources, helping investors make informed decisions and fostering a more resilient financial ecosystem.
For market participants, the study highlights the importance of including a mix of traditional, green and stable cryptocurrencies to improve portfolio diversification, especially in times of economic uncertainty. Portfolio managers can use cryptocurrencies such as Tether and gold to hedge against interest rate and inflation risks, respectively, while retail investors should be educated on diversifying their holdings by combining different sorts of cryptocurrencies and gold. Even Bitcoin is emerging as a safe-haven against inflation in times of rising interest rates and inflationary pressures. Institutional investors can develop strategic asset allocation models that include cryptocurrencies and ensure regulatory compliance to mitigate legal and operational risks. Policymakers should create clear regulatory frameworks that balance innovation with investor protection, and financial analysts can provide market analysis and educational resources to help investors make informed decisions.
