CAIA Blog: Hedging Your Bets On Cryptocurrencies February 14, 2021
February 2021 - Crypto
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What is the most effective proxy-hedging instrument for the Bitcoin/USD market? A recent study by Dominique Guegan, affiliated with Université Paris, Panthéon-Sorbonne, and two other scholars tackles this question. The study reaches no definitive conclusion, except the negative one that there is no way Bitcoin can be “fully hedged because the density forecasting capabilities of Altcoins are inadequate.” It also seems to favor Ethereum as the best of the available options, though the authors do not quite want to say so. Bitcoin is the matriarch of the altcoins family, and all the family members share some common features, so one might expect that the other coins could be used to hedge positions taken in the mother of them All vis-a-vis the dollar or another of the sovereignty-backed currencies. The problem, though, is that Bitcoin’s history shows “unusual volatility clustering effects” that are not among the econometric features of the other coins.
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