This chapter investigates the global crisis's impact on the safe-haven role of the two most significant cryptocurrencies based on their market capitalizations: Bitcoin and Ethereum. This study compares the volatility transmission between the Bitcoin and stock markets in four emerging countries: Indonesia, Malaysia, Nigeria, and South Africa. This study follows the framework of volatility transmission of Diebold and Yilmas. This research also investigates the safe-haven role of cryptocurrencies using the safe-haven regression analysis and decoupling hypothesis. Overall results support the notion of cryptocurrencies as alternative investments. On average, the pairwise volatility spillover between Bitcoin and stock market in Indonesia, Malaysia, Nigeria, and South Africa reverted back to half of its mean in about 2-3 days. This result suggests on the choice of short-term investment for investors in the Bitcoin market. This study contributes to the discussion of cryptocurrencies as safe haven.
TopIntroduction
In an increasingly developed economy with very diverse and broad investment possibilities, the characteristics of cryptocurrencies as an alternative investment have been widely studied. These studies are mostly about the pros and cons of managing this cryptocurrency. The Covid-19 pandemic has provided a natural laboratory to study the consistency and strength of cryptocurrencies as a hedging instrument or safe-haven in extreme economic conditions.
It is being stated that cryptocurrency has neither intrinsic value nor promised final payment (Geuder et al., 2019). However, cryptocurrencies' value highly depends on facilitating transactions and store value efficiently and effectively (Frankenfield, 2019). Therefore, the increasing price of Bitcoin could result from a price bubble, as being empirically detected from 2016 to 2018, with the critical point time at December 6, 2017 (Geuder et al., 2019). Market microstructure noise could affect Bitcoin's fluctuating price, in which the Bitcoin could be traded based on its noise.
During times of crisis or times with high volatility, financial markets tend to correlate significantly (Sandoval & Franca, 2012). The high correlation between asset classes during the crisis is extensively studied (see, for example(Forbes & Rigobon, 2016; Hartmann et al., 2004; Jang & Sul, 2002; Lin et al., 1994). The tendency of market behaviour as one during the crash shows the need for an asset that is uncorrelated during the crisis (Sandoval & Franca, 2012). The asset with related characteristics is further called the safe-haven asset (Baur & Lucey, 2010).
The lower returns of traditional financial investments during the low-interest-rate period lead the high-net-worth clients to invest in the “exotic” assets, i.e., wines, artworks, and collectable coins (Dimitriou et al., 2020). As a subset of the digital currency system, Bitcoin is initially developed as an online peer-to-peer payment system (Hong, 2017). Bitcoin has been accepted as a means of payment in Switzerland (Milutinovic, 2018) and Germany (Global Legal Research Center, 2018), also as both a payment method and legal tender in Canada (Global Legal Research Center, 2018). The Crypto Index (CRIX), a benchmark for the crypto market, and cryptocurrencies have low correlations with traditional assets from 2014 to 2017. Thus, it could be an excellent option to diversify portfolio risks (Lee et al., 2018). Therefore, cryptocurrency is considered an investment alternative (Hong, 2017; Lee et al., 2018).
It was widely studied how financial market tends to co-move during crisis. Therefore, there is a need of an asset that negatively correlated with other financial markets during crisis. This asset is later known as the safe-haven asset. The categorization of safe-haven asset has been revolting from the conventional assets (gold, bonds, land) into the alternative investments (hedge fund) (Wilcox & Fabozzi, 2013), and recently into the cryptocurrency. However, the empirical tests for safe-haven role of cryptocurrencies still have contradicting results (see, for example, (Baur & Lucey, 2010; Bouri et al., 2017, 2020; Shahzad et al., 2019; Stensås et al., 2019).
Despite all the research that has been done on cryptocurrencies, there is one question that the author tries to review through this chapter: “Is cryptocurrency ready to become an investment instrument?”.
To answer this, the authors need to review the news about Elon Musk's tweets and actions regarding Bitcoin. Starting from his investment of 1.5 billion US dollars in Bitcoin in February 2021, Elon Musk's actions have been highlighted by the public and became one of the causes of the surge in Bitcoin prices to reach a value of 900 million Indonesia Rupiah (IDR). However, other actions, such as the ban on the use of Bitcoin as a means of payment for Tesla cars in May 2021, contributed to the drastic fall in the value of this digital asset. Not only Bitcoin, but Elon Musk also causes the rise and fall of the price of other cryptocurrencies such as Dogecoin. This phenomenon is often known as “pom-pom investors”, or investors who have a stake in “creating” the public perception of an asset.
Before looking further into cryptocurrency readiness, the authors need to revisit the definition of assets and investments. An asset is a thing of value that a person or company owns. Investment itself is a commitment of money to expect future benefit (Bodie et al., 2014). Referring to the two definitions, cryptocurrency can be categorized as an asset that becomes an investment instrument. This relates to how cryptocurrencies have exchange rates and are traded on a platform, and the goal of crypto players is to make profits in the future.