Bitcoin as an Investment and Hedge Alternative. A DCC MGARCH Model Analysis

Abstract

Volatility and investor sentiment have been factors for the slow adoption rate of Bitcoin (BTC) that was first recognized in 2008 as a potential store of value, investment vehicle and a hedge alternative to gold during a recession. The purpose of this applied mathematics study will use a multivariate DCC GARCH model. Bitcoin holds its ground in volatility. This study examines Bitcoin as an investment and hedge alternative to gold as well as the major stock index. To perform the research to explore the viability of Bitcoin as an investment and hedge alternative to gold, the authors conducted a DCC GARCH model analysis. The findings of this research paper confirm Bitcoin’s cyclical performance between volatility and adoption. The findings give a strong ground for Bitcoin as the new digital currency, store of value, medium of exchange, and a unit of account and incentivize further research by theorists, scholars and examiners. The significance of this applied mathematics research and analysis will allow an unstoppable, incorruptible, and uncontrollable store of value, and investment vehicle, without governmental or institutional intervention. This study contributes by comparing and contrasting volatility stability based on the return levels of each Bitcoin on major indexes traded with BTC (based on fiat currencies) and gold.

Is Bitcoin a Safe Haven for Indian Investors? A GARCH Volatility Analysis

“…They have utility but can never be a Store of Value (SoV) as they are not completely scarce. Scarce objects have conservation energy, such as what we observe in thermodynamics (Rudolf et al 2021). Bitcoin's scarcity arises from two dynamics: the first-order dynamic is a decentralised network running on thousands of nodes, and therefore, it is impossible to change the operation in the network without taking over the whole network (massive inertia), and the second-order dynamic is cloning which has failed, owing to Bitcoin's multiple network effects (Böhme et al 2015;Rudolf et al 2021).…”

“…For instance, a simple Google search of the US Dollar will not impact its volume and value but can influence the prices of Bitcoin or any other cryptocurrency (Aalborg et al 2019). As per Rudolf et al (2021), traditional stores of value are valuable due to their scarcity, when large networks of people seek them, or their ability to generate income. They have utility but can never be a Store of Value (SoV) as they are not completely scarce.…”

“…In May 2020 when the third halving was done, there were no drastic consequences on the price of Bitcoin. As per Rudolf et al (2021), Bitcoin obeys the Austrian school's definition of currency as Hayek envisioned as it serves as an MoE (medium of exchange). According to Hayek, the only way to ensure the prevention of currency inflation was to allow economic agents to choose multiple currencies within their own nations (Rudolf et al 2021).…”

“…As per Rudolf et al (2021), Bitcoin obeys the Austrian school's definition of currency as Hayek envisioned as it serves as an MoE (medium of exchange). According to Hayek, the only way to ensure the prevention of currency inflation was to allow economic agents to choose multiple currencies within their own nations (Rudolf et al 2021). Bitcoin's characteristic as a store of value has been the subject of much debate.…”

Does Bitcoin Provide a Hedge to Islamic Stock Markets During and Post-COVID-19 Outbreak? Evidence From Asia Based on a Multivariate-GARCH Approach

“…Using a time-varying volatility model suitable for the variables of interest (see Rudolf et al, 2021), we find evidence in support of the hedging potential of Bitcoin for the Asian Islamic stocks during the COVID-19 pandemic. The results supporting this conclusion complement the grow-ing importance of the Asian economy and Islamic financial markets.…”