Abstract
We compare the hedging, safe-haven, and diversification potential of gold and Bitcoin for different investment styles and industry portfolios in the United States. We find that gold is at least a weak hedge for the style and industry portfolios except for utilities, energy, and telecom. The hedging potential of gold is comparatively higher for large-cap portfolios, whereas Bitcoin offers minimal hedging effectiveness. However, Bitcoin shows hedging potential for the noncyclical industries. Although investors need a higher amount of investment to hedge the downside risk using gold, it still is a superior hedging instrument compared with Bitcoin. Finally, the analysis using the conditional diversification approach shows that gold is a superior and stable diversifier for style and industry portfolios. Overall, our findings provide evidence of superior safe-haven and hedging potential of gold over Bitcoin.
Highlights
In this study, we compare the hedging, safe-haven, and diversification potential of gold and benefits arising from combining gold (Bitcoin) for various investment styles and industry portfolios
The hedging potential of gold is more pronounced for large-cap style portfolios, whereas Bitcoin offers minimal hedging potential
We estimate and evaluate the hedging effectiveness and conditional diversification benefits that gold and Bitcoin offer for equity investors
Summary
We compare the hedging, safe-haven, and diversification potential of gold and Bitcoin for various investment styles and industry portfolios. Much of the empirical evidence confirms the hedging ability of gold for stock markets (Baur & Lucey, 2010; Baur & McDermott, 2010). In the aftermath of the global financial crisis (GFC), the hedging and safe-haven properties of gold have diminished (Baur & Glover, 2012; and Baur & McDermott, 2016). Often found as weakly linked with most other financial assets, Bitcoin exhibits an extremely low correlation with the stock market, and positive co-movement with gold Naeem et al (2020), thereby offering a wide range of opportunities for hedging and diversification (Baur, Hong, & Lee, 2018 and Guesmi et al, 2019). It is due to those attractive benefits of Bitcoin that even the financial press has started comparing the merits of Bitcoin and gold for financial markets, especially the stock market (Forbes, February 13, 2018)
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