Do Bitcoin and Traditional Financial Assets Act as an Inflation Hedge during Stable and Turbulent Markets? Evidence from High Cryptocurrency Adoption Countries

Abstract

This study analyzes whether Bitcoin, gold, oil, and stock have the ability to hedge against inflation in high cryptocurrency adoption countries in the periods from January 2010 to March 2021. It is hypothesized that the assets behave differently and thereby respond differently to inflation in different market conditions. Therefore, we employ the Markov Switching Vector Autoregressive to examine these assets’ hedging ability against inflation in both stable and turbulent market regimes. Our main findings are threefold: We show that there exists a structural change and nonlinear relationship between the returns of hedging assets and inflation. Second, all assets can hedge against inflation more effectively in the short run than in the long run. We find that the inflation hedging ability of these assets are weak in the long run for both market regimes. We also find some evidence that the rigidity between the assets and inflation is relatively high in the stable regime. Third, according to the impulse response analysis, we also find that the responses of assets to inflation shock are heterogeneous across two market regimes.

Measuring the sensitivity of bond, equity, gold and real estate investment returns to changes in the level of inflation

“…For the cointegra�on analysis, the Engle -Granger test was used (Engle, Granger 1987). Finally, following the work of Salisu et al (2020) and Phochanachan et al (2022), a linear regression analysis with ordinary least squares (OLS) parameter es�ma�on was performed. Percentage returns were used for this analysis.…”

“…The research period was determined by the available Bitcoin quotes. Phochanachan et al (2022) analysed Bitcoin, gold, oil, and equi�es in terms of investors' hedging against infla�on. They considered dollar-quoted asset quotes and infla�on rates for selected countries: Ukraine, Russia, Singapore, Kenya, United States, India, South Africa, Nigeria, Columbia and Vietnam.…”

An Empirical Investigation of Bitcoin Hedging Capabilities against Inflation using VECM: The Case of United States, Eurozone, Philippines, Ukraine, Canada, India, and Nigeria

“…For many decades, gold has been the only asset considered by many investors and portfolio managers to be a "safe haven" or have hedging capabilities against inflation; however, since the creation of Bitcoin in 2008, scholars have been researching its hedging capabilities against inflation because of the high return and no central authority controlling the ecosystem. Furthermore, Bitcoins' ability to hedge against inflation can be attributed to several key factors (Phochanachan et al, 2022), such as having a fixed supply, unlike conventional fiat currencies that are prone to inflationary monetary policies (Ashimbayev and Tashenova, 2018). For Bitcoin to be called a "safe haven" or considered to have the hedging ability against inflation, it is important to understand the full definition of this strategy (Phochanachan et al, 2022).…”

“…Furthermore, Bitcoins' ability to hedge against inflation can be attributed to several key factors (Phochanachan et al, 2022), such as having a fixed supply, unlike conventional fiat currencies that are prone to inflationary monetary policies (Ashimbayev and Tashenova, 2018). For Bitcoin to be called a "safe haven" or considered to have the hedging ability against inflation, it is important to understand the full definition of this strategy (Phochanachan et al, 2022). A safe haven asset refers to a financial instrument that is not impacted or is inversely affected by the general state of the economy.…”

“…The last strategy is popularly used by researchers to empirically examine hedging against inflation (Phochanachan et al, 2022). Likewise, (Fama and Schwert, 1977) stated that an asset could fully or partially hedge inflation if the correlation between the asset returns and the expected inflation rate is positive; otherwise, it cannot hedge inflation if the correlation is negative.…”