Safety assessment of cryptocurrencies as risky assets during the COVID-19 pandemic

Abstract

This study examines the safe-haven properties of cryptocurrencies during the COVID-19 pandemic by exploring various cryptocurrency allocation strategies and their impact on downside risk compared to holding only the stock market index. Spanning from 2019 to 2021, the analysis includes seven cryptocurrencies—Bitcoin, Ethereum, Litecoin, Dash, Maker, Monero, and NEO—and six stock market indexes—SP500, FTSE, CAC40, IBEX, AEX, and DJIM. The research introduces a portfolio optimization approach focused on mitigating significant losses during crises, employing Value at Risk (VaR), Modified Value at Risk (MVaR), and Conditional Value at Risk (CVaR) metrics across different portfolio compositions. Findings highlight several key insights: higher cryptocurrency allocations correlate with increased downside risk, with none of the studied cryptocurrencies acting as a safe haven for international equity indexes during the COVID-19 pandemic. Relative MVaR exceeds CVaR across most combinations, and Maker demonstrates the highest downside risk, while Bitcoin and Litecoin exhibit the lowest risk levels based on CVaR and MVaR, respectively. Integration of the FTSE index is associated with peak risk levels, whereas incorporating DJIM and AEX shows reduced risk exposure. The study contributes novel insights into cryptocurrency risk dynamics during the COVID-19 pandemic, offering valuable implications for risk management strategies in investment portfolios.