Analysis of the hedge functions of Bitcoin, Gold, and their Portfolios - Based on global events

Abstract

The global current situation continues to be turbulent. International crises like the Covid-19 epidemic and the continuing Russian-Ukrainian war have thrown the global economy for a loop. As a result, global economic policy uncertainty has spiked due to the resulting spike in energy prices and economic disruptions. During the outbreak of Covid-19, prices of bitcoin (BTC) have moved higher, but its hedging effect is weakening. Also, combined with rising global inflation expectations and the constant rate hikes by central banks against inflation, bitcoin's hedging effectiveness is waning due to its strong correlation with equities. Furthermore, with the outbreak of the Russian-Ukrainian war, the price of gold continued to rise, and the relationship between gold and the global financial market decreased, confirming gold's diversification ability in a crisis. Simultaneously, the link between gold and bitcoin has weakened marginally. Ultimately, preliminary evidence suggests that gold and bitcoin can be used as complements, rather than substitutes, for diversification purposes during a crisis. This article will construct a portfolio about bitcoin and gold, and examine how individual gold and bitcoin and this portfolio performed as hedging assets throughout the Covid-19 pandemic and the Russian-Ukrainian war.