A Crypto Safe Haven against Bitcoin
Introduction :
Some researchers confirm the idea that Bitcoin has characteristics similar to gold, as well as a store of value and a safe haven. While other researchers indicate the opposite due to its extreme volatility, hence several investors are looking for a safe haven against Bitcoin.
In 2020, Baur and other researchers investigated the safe-haven property of stablecoins against Bitcoin volatility. Stablecoins are an important class against cryptocurrencies, as they offer a level of security and stability to an asset class that is usually very volatile and very risky. Stablecoins should, therefore, have relatively low volatility and do not react to Bitcoin returns under the same market conditions.
Baur notes that stablecoins are not always stable. For this reason, they distinguish between the properties "stable" and "refuge". Indeed, stablecoins that can react positively to Bitcoin's negative returns represent solid safe havens. On the other hand, stablecoins that cannot react to Bitcoin's negative returns, are weak safe havens. the researchers analyze the returns of the six largest stablecoins (and four alternative "non-stablecoins") and their correlation with Bitcoin returns using one-minute returns, hourly and daily returns.
They find that the "safe haven" property of stablecoins, against Bitcoin, is relatively strong in some cases. That is, some stable coin returns are negatively correlated with negative changes in Bitcoin prices. Since stablecoins react to such changes, they are not always stable.
Problem :
In this article, the researchers need to find answers to this question:
What alternative assets could serve as safe havens against Bitcoin's negative returns?
Objective :
this article have an objective to examine whether stablecoins are not correlated with changes in the average and extreme prices of Bitcoin.
Literature review :
- According to Harvey (2014), Corbet, Lucey, Peat and Vigne (2018) and Smales (2019) document that the volatility of Bitcoin is higher than that of stocks.
- According to Yermack (2013), Bitcoin shows no correlation of returns with the two international currencies and gold.
- Karl Baumöhl (2019) finds that there are negative dependencies between Bitcoin and fiat currencies in the short and long term.
- Wang Yi, Xu and Wang (2018) study the relationship of volatility between cryptocurrencies, and find that Bitcoin is affected by the volatility of other smaller cryptocurrencies.
- But other studies analyze the safe haven property of Bitcoin (for example, Baur, Hong and Lee (2018), Bouri, Molnar, Azzi, Roubaud and Hagfors (2017), Klein, Thu and Walther (2018), Symitsi and Chalvatzis (2019)), the relationship between Bitcoin and other macro-variables such as economic policy uncertainty (Demir, Gozgor, Lau and Vigne (2018)) or the market attention (Dastgir, Demir, Downing, Gozgor and Lau (2019)).
Data and methodology :
In 2020, Baur and other researchers are using the following econometric model to examine the relationship between stablecoins and Bitcoin under normal and extreme market conditions :
Baur et al. (2020) include Tether (USDT), USD Coin (USDC), TrueUSD (TUSD), Paxos Standard Token (PAX), Dai (DAI) and Gemini Dollar (GUSD) based on their market capitalization
Results :
In this article, Baur finds, by analyzing the results of the one-minute Bitcoin yield estimation, that :
- The coefficient R_BTC is positive and statistically significant, which implies that USDT, TUSD and DAI are correlated with Bitcoin in a normal market. While the GUSD variable shows a negative correlation against movements in Bitcoin yields.
- For extreme Bitcoin returns, the variables (USDT, PAX and GUSD) have negative coefficients for certain shocks indicating that these stablecoins react positively to negative Bitcoin price changes.
Regarding the longest horizons, Baur find that :
- All stablecoins display negative coefficients against Bitcoin returns with the exception of the GUSD variable which has a positive coefficient. This implies that the USDT is a safe haven against Bitcoin unlike the GUSD variable.
- Tether shows a strong effect of a solid safe haven because this variable reacts positively to Bitcoin's extreme returns. On the other hand, the other stablecoins have low safe-haven values because they display insignificant or significantly positive coefficients but incompatible with the definition of a solid safe-haven value.
Conclusion :
This article examines the safe haven property of stablecoins against Bitcoin's extreme returns. If a stable coin does not react with Bitcoin in times of its extreme volatility, in this case the stable coin is considered a low safe haven.
On the other hand, if a stablecoin reacts positively to Bitcoin's extremely negative returns, the stablecoin does not bear its stability name, as well as it offers a solid safe haven. If a stable coin reacts negatively to Bitcoin's high returns, it is neither stable nor a safe haven.
Analyzing the returns of stablecoins with different frequencies shows that stablecoins are not stable consistently and reliably at all times.
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