This paper empirically assessed the ability of three stablecoins to mitigate the downside risk of a traditional cryptocurrency portfolio. The findings indicated that dollar-backed stablecoins are particularly suitable as a hedge for crypto investors.
hedging strategies
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| Research question | How do stablecoins mitigate the downside risk of cryptocurrency portfolios? |
| Methodology | Empirical assessment with a monthly rebalance experiment. |
| Data and sample | Out-of-sample period. |
This paper empirically assesses the ability of three putative stablecoins (two dollar-backed, Tether and USD Coin; and one gold-backed, Digix Gold) to mitigate the risk of facing severe losses (downside risk) of a traditional cryptocurrency portfolio. There are institutional features that induce cryptoinvestors to use stablecoins as diversifiers instead of withdrawing dollars or adding assets traditionally considered as safe havens, such as gold, crude oil, etc. Stablecoins, however, are not as stable as their name and collateralized peg suggest. A monthly rebalance experiment is conducted over an out-of-sample period considering higher order conditional moments when dynamically measuring the tail risk of cryptocurrency portfolios. The empirical evidence shows that the low conditional correlations of dollar-backed stablecoins with cryptocurrency portfolios make them particularly suitable as a hedge for crypto investors. It also shows that all stablecoins considered have high diversification capacities by systematically reducing portfolio tail risk.
Antonio Díaz, Carlos Esparcia, Diego Huélamo (2022). Stablecoins as a tool to mitigate the downside risk of cryptocurrency portfolios The North American Journal of Economics and Finance.
@article{az2022stablecoinstoolmitigatedownside,
title = {Stablecoins as a tool to mitigate the downside risk of cryptocurrency portfolios},
author = {Antonio Díaz and Carlos Esparcia and Diego Huélamo},
year = {2022},
institution = {Elsevier BV},
journal = {The North American Journal of Economics and Finance},
doi = {10.1016/j.najef.2022.101838},
url = {https://doi.org/10.1016/j.najef.2022.101838},
note = {Indexed by Stablecoin Beat},
}