Bitcoin amid the COVID-19 Pandemic: Revisiting Bitcoin's Safe Haven and Portfolio Performance-Enhancing Properties

Caroline Mathilde Pit & Frederikke Toft Sørensen

Student thesis: Master thesis

Abstract

Against a backdrop of the COVID-19 pandemic, investors fear an impending global financial crisis as uncertainty about the future economic outlook prevails. In pursuit of limiting financial losses, investors seek out assets, which carry value amid financial stress. Since the inception of Bitcoin, its high returns, volatility, as well as independence of government and monetary policy have led academics and practitioners to inconclusively associate Bitcoin with the search for safe haven and portfolio performance-enhancing assets during financial distress. The purpose of this thesis is to revisit Bitcoin’s investment properties by testing its safe haven ability and performance-enhancing properties to a diversified portfolio during the hitherto COVID-19 pandemic - the first instance of severe global financial market stress since Bitcoin’s inception. As part of a threefold approach using data from October 2013 through August 2020 as well as several shorter sub-periods within that timeframe, this thesis firstly identifies Bitcoin’s time-limited and varying safe haven properties during COVID-19 for two of the 23 examined asset indices by regressing DCC GARCH estimated time-varying correlations between Bitcoin and each index. Secondly, in line with the compulsory liquidity requirement for safe havens, this thesis finds that Bitcoin’s bid-ask spread and transaction costs remained relatively low compared to previous periods and other assets, thus supporting Bitcoin’s modest safe haven properties amid COVID-19. Thirdly, the construction of 96 mean-variance and mean-CVaR optimized portfolios consisting of test (including Bitcoin) and benchmark (excluding Bitcoin) diversified tangency and global-minimum-variance portfolios adverts to Bitcoin’s minor role in portfolio optimization. Moreover, the study discloses that Bitcoin has the potential to increase the Sharpe Ratio of the portfolios but proves less suitable and consistent for investors seeking to reduce their portfolios’ modified VaR and CVaR or increase the Sortino and Adjusted Sharpe Ratio. While this study contributes with a comprehensive examination of Bitcoin amid COVID-19, it is questionable whether the pandemic has caused sufficient global financial distress to draw generalizable inferences about Bitcoin’s investment properties during crises.

Educations, (Graduate Programme) Final ThesisMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2020
Number of pages141
SupervisorsSøren Plesner