FxWirePro: Bitcoin comes as optimal hedging vehicle and also assures expectations of investment horizon

The US Fed interest rates impact on bitcoin to a degree that most people will not grasp. In an evolution of currency system, we've reached the stage where everything around commerce has been digitalized, from barter to gold, then from gold to other bullion, then switching over to paper currency system. Now is the time for digital currencies.

The higher the rates are, the higher the demand for bitcoin would be. Bitcoin would also rise with an interest rate hike because unlike gold, there is further upside in the capital value of bitcoin, so the need for some type of yield to offset it is greatly reduced.

A recently released study on the relationship between global uncertainties and bitcoin discovers that digital currency performs positively to volatilities. Evaluating a long span of time from Mar’2011 to Oct’2016 by using the VIX index, a extensively used key market risk indicator that reflects market sentiment and investor expectation of 14 countries that includes both G7 and G20 nations, Brazil, Canada, China, France, Germany, India, Japan, Mexico, Russia, South Africa, Sweden, Switzerland, the UK and the US, the study concludes:

Bitcoin is evidenced to aid as a hedge vehicle against volatility at the extreme ends of the Bitcoin market and global uncertainty but at shorter investment horizons. Therefore, short-horizon investment in Bitcoin can help investors’ hedge global equity market uncertainty, especially when the market is functioning in bear and bull regimes and also when uncertainty is either low or high.”

By using a quantile regression framework as well as a well-known method of wavelets to decompose Bitcoin returns into its various investment horizons, the study was able to provide a more nuanced view in analyzing the effect of different levels of uncertainty as well as different time frames. The study finds that:

“The ability of Bitcoin to act as a hedge against uncertainty is conditional on not only whether the market is in bear or bull regime but also whether global uncertainty is high or low. Specifically speaking, at shorter investment horizons, Bitcoin returns seem to hedge against the global uncertainty at extreme ends of both Bitcoin returns and uncertainty.”

Bitcoin’s role as a hedge against uncertainty has widely been speculated recently, especially following the digital currency’s surpassing of gold parity in its most popular and liquid exchanges. Its accelerated bull run since summer coincided with a number of monetary miscomputations by authorities in as diverse countries as China, India, Brazil, Venezuela, Nigeria and others, leading to an increased interest in bitcoin according to internet searches, sending the price higher and higher.

The method confirmation of this role may increase serious interest in bitcoin as an asset class which acts as a hedge when uncertainty is both very high and very low, potentially leading to its inclusion in more established trading houses to minimize risks while trying to maximize gains.

It’s increased market cap to surpass that of Twitter may further aid towards such aim, with the currency significantly maturing since its amateurish early days in 2011 and even 2013, leading to a marked decrease in volatility by comparison, and thus a decrease in risk, so far in any event.