Bitcoin: An inflation hedge but not a safe haven

Abstract

During the recent COVID-19 pandemic, many commonalities shared by Bitcoin and gold raise the question of whether Bitcoin can hedge inflation or provide a safe haven as gold often does. By estimating a Vector Autoregression (VAR) model, we provide systematic evidence on the relationship among inflation, uncertainty, and Bitcoin and gold prices. Bitcoin appreciates against inflation (or inflation expectation) shocks, confirming its inflation-hedging property claimed by investors. However, unlike gold, Bitcoin prices decline in response to financial uncertainty shocks, rejecting the safe-haven quality. Interestingly, Bitcoin prices do not decrease after policy uncertainty shocks, partly consistent with the notion of Bitcoin's independence from government authorities. We also find an interesting asymmetry in the drivers of Bitcoin price dynamics between the bullish and bearish market. The main findings hold with or without the COVID-19 pandemic episode.

Keywords: Bitcoin; COVID-19; Cryptocurrencies; Gold; Inflation-hedging; Safe-haven.

Fig. 1

The evolution of the Bitcoin prices and other variables. Note: This graph plots the time series of Bitcoin prices and other macroeconomic and financial variables. The natural logarithm is taken to Bitcoin and gold prices, S&P 500, oil prices, the dollar index, and the OPI.

Fig. 2

The response of Bitcoin and gold prices: baseline model Note: This graph shows impulse responses of Bitcoin and gold prices to the one-standard-deviation shock in other variables and their 90% confidence bands from the six-variable VARs for the sample period between July 21, 2010, and December 31, 2020. The units of the horizontal axes are a week. The graphs on the top illustrate the response of Bitcoin prices, and the graphs on the bottom illustrate the response of gold prices.

Fig. 3

Forecast error variance decomposition of Bitcoin and gold prices Note: This graph shows forecast error variance decomposition of Bitcoin and gold prices for the sample period between July 21, 2010, and December 31, 2020. The units of the horizontal axes are a week.

Fig. 4

Historical decomposition of Bitcoin and gold prices Note: This graph shows the historical decomposition of Bitcoin and gold prices for the sample period between July 21, 2010, and December 31, 2020.

Fig. 5

The response of Bitcoin and gold prices: using the OPI Note: This graph shows impulse responses of Bitcoin and gold prices to the one-standard-deviation shock in other variables and their 90% confidence bands from the six-variable VARs using the OPI instead of inflation expectation derived from the financial market data. The sample period covers from July 21, 2010 to April 11, 2018. The units of the horizontal axes are a week. The graphs on the top illustrate the response of Bitcoin prices, and the graphs on the bottom illustrate the response of gold prices.

Fig. 6

The response of Bitcoin and gold prices: using the EPU Note: This graph shows impulse responses of Bitcoin and gold prices to the one-standard-deviation shock in other variables and their 90% confidence bands from the six-variable VARs for the sample period between July 21, 2010, and December 31, 2020. The units of the horizontal axes are a week. The graphs on the top illustrate the response of Bitcoin prices, and the graphs on the bottom illustrate the response of gold prices. We use the baseline specification but replace the VIX with the EPU index.

Fig. 7

The response of Bitcoin prices: model with the dollar index and oil prices Note: This graph shows impulse responses of Bitcoin and gold prices to the one-standard-deviation shock in other variables and their 90% confidence bands from the baseline model but replacing gold prices with the dollar index (Panel A) and oil prices (Panel B). The units of the horizontal axes are weeks.