Bitcoin vs Gold, The Hedge Game - Volatility and Portfolio Analysis of Bitcoin and Gold during Market Distress

Sammanfattning: Over the recent years the interest in cryptocurrencies and Bitcoin has increased significantly. The price of Bitcoin has gone up substantially since the end of 2020 and more individual and institutional investors are incorporating Bitcoin to their portfolio. This thesis explores the features of Bitcoin as another financial asset, specifically compared to Gold as Bitcoin has been referred to as the new “Digital Gold”. The main appeal of Gold is its properties as a hedge and safe haven. The recent market distress caused by COVID-19 provides the perfect conditions to examine if Gold and Bitcoin can provide investors with these features in a time of market turmoil. This is done by using ARCH models to examine the volatility behavior of Bitcoin and other assets. Thereafter a BEKK-GARCH model will be used to examine the relationship of Bitcoin and Gold to other assets. Finally, to examine the hedging properties, a portfolio analysis will be done using the minimum variance portfolio. The results indicate that Gold does act as a hedge and safe haven as has been claimed in earlier literature. Interestingly for Bitcoin, the results show that it increases the return and reduces the volatility on average when included in a portfolio with the OMXS 30 and NIKKEI 225. Bitcoin also provides an increased return in a minimum variance portfolio during market turmoil, consequently meaning that it provides a sort of “mini-hedge”.