Hedging the downside risk of commodities through cryptocurrencies

ABSTRACT

Today, commodities are exposed to ever-increasing price volatilities due to extreme market uncertainties linked with financialization. The paper addresses a timely question of whether cryptocurrencies are hedge and safe-haven for commodities. We focus on this literature gap by using individual commodities from four groups, including metal, agriculture, precious metal, and energy. Further, we also consider four major cryptocurrencies, namely, Bitcoin, Ethereum, Litecoin, and Ripple for our analysis. Our findings show the functional role of cryptocurrencies as hedge and safe-haven for individual commodities. Moreover, the underlying properties are persistent during the crisis period.

KEYWORDS:

• Cryptocurrencies
• commodities
• hedge
• safe-haven

JEL CLASSIFICATION:

• G11
• G15

Disclosure Statement

No potential conflict of interest was reported by the authors.

Notes

¹ For detailed review of testimony, the readers are referred to Masters (2008).

² We identify the negative explosive periods using Phillips, Wu, and Yu (2011) and Gronwald (2016). We do not provide details of the estimation due to space consideration but we refer the reader to the original paper. The estimations are available upon request.