ESSEC Business School is delighted to organize a Workshop on “Nonstandard Investment Choice” that will take place on September 20, 2019 at ESSEC Campus in Cergy.
This workshop aims at bringing together, during a full one-day event, international scholars doing research in a wide range of topics including, but not limited to, behavioral portfolio choice models, asset allocation with derivatives, portfolio insurance, hybrid portfolios, crypto-assets and blockchain, energy and commodity assets, alternative investments, and frictional asset allocation.
Is bitcoin the new digital gold? Ten years after the seminal work of Satoshi Nakamoto in 2008, at which time he introduced the bitcoin, a heated debate has started about this matter, and a wide audience has participated, including academics, practitioners (asset managers, financial advisors and investors) and journalists in the financial press. Although bitcoin and gold are two basically different assets in several respects (free of sovereign risk and independent from regulatory authorities), their statistical behavior leads us to consider if bitcoin – similarly to gold – could provide diversification benefits during downside market conditions. Such market conditions are a primary concern for investors.
To contribute to the current debate for the role of bitcoin as a new digital gold, we examine the potential benefits of bitcoin during extremely volatile periods in financial markets, using the multivariate extreme value theory. This statistical theory is the appropriate approach to model the tail dependence structure.
For our analysis, we focused on the correlation of extreme returns and we adopted a four-step research strategy.
Step 1. We considered a position in equity markets (Europe and the United States). We found that the extreme correlation increases during stock market crashes and decreases during stock market booms.
Step 2. We combined each equity market with bitcoin. We found that the correlation of extreme returns sharply decreases during both market booms and crashes. This means that bitcoin can play an important role in portfolio risk management during extreme market movements.
Step 3. We combined each equity market with gold. We found a similar result, confirming the well-recognized status of gold as a safe haven.
Step 4. We examined the joint behavior of bitcoin and gold. We found a low level of extreme correlation. This means that bitcoin and gold can be useful together in an equity portfolio in times of turbulence in financial markets.
Our findings showed that bitcoin can be considered as the new digital gold. However, gold is still important in an equity portfolio. To the question: “Is bitcoin the new digital gold?” we answer that both bitcoin and gold are the best choice.