2024-04-25T10:28:22Z

2024-04-25

Default License

S&P500

Hedging instrument

Financial markets

The puzzling role of Bitcoin

2024-04-21

free

School of Economics, Business Administration and Legal Studies, MSc in Banking and Finance

Bitcoin has become a significant asset in the global financial market. This dissertation examines the dynamic relationship between the cryptocurrency and the S&P 500 index, focusing on whether Bitcoin can be used as a hedger for portfolio diversification and contribute to amplification of overall market risk. Hedging is a fundamental risk management strategy utilized by investors to mitigate potential losses and protect against adverse market conditions. Traditional financial instruments, such as stocks, bonds, and commodities, have long served as hedging assets. However, the recent rise of Bitcoin as a decentralized digital currency has sparked interest in its potential as an alternative hedging instrument. The dissertation begins by reviewing the existing literature on Bitcoin, hedging theory, and the integration of cryptocurrencies into financial markets. A thorough analysis of the characteristics and properties of Bitcoin is conducted, exploring its volatility, and correlation with the market represented by Standard and Poor's 500 (S&P500). Furthermore, the dissertation examines the two asset classes and investigates whether Bitcoin Granger causes the index utilizing all available information. This analysis serves as a foundation for understanding the potential effectiveness of Bitcoin as a hedging instrument shedding light on potential implications for investors, portfolio managers, and policymakers. The findings of this research contribute to the existing body of knowledge by providing empirical evidence on the role of Bitcoin as a hedging instrument. They indicate that Bitcoin can act as a hedger when extreme volatility spreads between the cryptocurrency and S&P500 occurs. The results offer insights for investors, financial institutions, and policymakers seeking to understand the potential benefits and risks associated with integrating Bitcoin into their risk management strategies. The dissertation ends with a discussion of the research's implications and suggestions for future avenues of study.

Chantziaras, Antonios

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