Portfolio Diversification, Hedge and Safe-Haven Properties in Cryptocurrency Investments and Financial Economics: A Systematic Literature Review

Abstract

Our study collected and synthetized the existing knowledge on portfolio diversification, hedge, and safe-haven properties in cryptocurrency investments. We sampled 146 studies published in journals ranked in the Association of Business Schools 2021 journals list, considering all fields of knowledge, and elaborated a systematic literature review along with a bibliometric analysis. Our results indicate a fast-growing literature evidencing cryptocurrencies’ ability to hedge against stocks, fiat currencies, geopolitical risks, and Economic Policy Uncertainty (EPU) risk; also, that cryptocurrencies present diversification and safe-haven properties; that stablecoins reveal unstable peg with the US dollar; that uncertainty is a determinant for cryptocurrency returns. Additionally, we show that investors should consider Gold, along with the European carbon market, CBOE Bitcoin futures, and crude oil to hedge against unexpected movements in the cryptocurrency market.

Is the cryptocurrency market a hedge against stock market risk? A Wavelet and GARCH approach

“…Regarding our first hypothesis, we have found evidence through conditional correlation and wavelet coherence analysis that the connection between cryptocurrencies and stock returns is heterogeneous and depends on market conditions and digital currency properties. Similar results have been found in earlier studies by Almeida and Gonçalves (2022) and Jana et al (2023). Specifically, we have observed that unstable currencies (Bitcoin, Ethereum, Binance Coin, and Dogecoin) exhibit strong and positive comovement with stock returns during economic turmoil (COVID pandemic and Russia–Ukraine war).…”

“…On the other hand, stable cryptocurrencies show a nearly zero or negative correlation with the studied stock returns during the study periods. This finding confirms that stable cryptocurrencies (Tether and USD Coin) can play a hedging role during regular times and, most importantly, a safe haven role during economic turmoil periods for stock market returns (Almeida & Gonçalves, 2022;Conlon et al, 2020;Goodell & Goutte, 2021;Hasan et al, 2021). Consequently, the second hypothesis that the cryptocurrency market has the ability to serve as a hedging or safe haven asset in stock markets is supported for stable cryptocurrencies but rejected for unstable currencies.…”

“…Conversely, Tether has emerged as a safe haven asset for global indices during the COVID‐19 pandemic (Goodell & Goutte, 2021; Syuhada et al, 2022), owing to its consistent peg to the US dollar. Almeida and Gonçalves (2022) have reviewed several pieces of literature and found that cryptocurrencies' hedging ability is time‐varying and may hedge geopolitical risk, stock, and fiat currencies. Moreover, diversification and the capacity to act as a safe haven evolve with time and are conditional on market circumstances.…”

Effect of Investment Diversification in Short-term Government Securities on the Financial Performance of Retirement Benefits Schemes in Kenya

“…The assimilation of this theory by majority of investors is because of their speculative predispositions which could range from precautionary to transactionary motives (Shukrani & Banafa, 2019). This theory purports that the transactionary motive push investors to hold highly liquid assets such as the short-term government securities (SGS) so that they may not suffer from illiquidity (Almeida & Gonçalves, 2023). Liquidity maybe a concern to an entity based on their assets and liabilities combination as well as their working capital status (Kiboi & Bosire, 2022).…”

Diversification of the Islamic stock market, Bitcoin, and Bullions in response to the Russia-Ukraine conflict and the COVID-19 outbreak

“…[ 23 , 24 ], and [ 59 ] have provided evidence of the positive impact of precious metals on cryptocurrencies. [ 22 , 25 , 26 , 60 ], and [ 46 ] have found evidence of the positive impact of precious metals on Islamic stocks, especially during periods of economic uncertainty. These studies suggest that investors should consider diversifying their portfolios by including precious metals with cryptocurrencies or Islamic stocks to reduce overall risk.…”