The Covid Shock, The Rise of Defi, and Bitcoin's Increasing Market Risk

Abstract

This paper aims to determine whether Bitcoin’s market risk increased in response to the COVID-19 shock. Our analysis employs familiar asset pricing models used by investment managers. Our main result is that Bitcoin’s market risk increased after the lockdown in March 2020. Wavelet analysis that captures both time and scale changes is introduced, and risk estimates that allow for both time and scale changes are provided, consistent with our main finding. From the standpoint of traditional investments, we find that the market risk of a Bitcoin investment after March 2020 is similar to that of a risky tech stock.