Roles of stable versus nonstable cryptocurrencies in Bitcoin market dynamics

Abstract

This work assesses the roles of nonstable and stable cryptocurrencies in the dynamics of the Bitcoin market. Formally, we aim to study the return and volatility transmissions between Bitcoin and stablecoins in comparison with Bitcoin/nonstable cryptocurrency pairs. Accordingly, we deduce the optimal portfolio weights based on the hedging strategy. Our results explain which cryptocurrency plays the role of safe haven or hedge and whether the relationship can be described more by the contagion effect versus interdependence based on fundamentals. We observed bidirectional return transmissions between Bitcoin and both nonstable as well as stable cryptocurrencies. The volatility transmission is bidirectional for Bitcoin/Ethereum and Bitcoin/Bitcoin Cash over the short and long terms and unidirectional for Bitcoin/Tether and Bitcoin/TrueUSD over the short term. There are no long-term bidirectional volatility transmissions except for Bitcoin/TrueUSD. The optimal portfolio weights of stable (nonstable) cryptocurrencies are found to be lower (higher) than that of Bitcoin.