Cryptocurrency as a Hedging Alternative- DCC GARCH Model Analysis using R Programming

Abstract

The use of cryptocurrencies is trending worldwide and represents cutting-edge development in the financial technology sector. Bitcoin is the most widely used cryptocurrency and holds the top spot in terms of market capitalization at present. This study contributes to the continuing discussion regarding whether Bitcoin is useful for financial investments. This paper aims to evaluate the viability of bitcoin as an alternative instrument for portfolio diversification and hedging. In this paper, the volatility of bitcoin is compared with stock market indices (SENSEX, Nifty-50), major currencies (USD (${\$}$), Euro (€), Pound Sterling (£), and Japanese Yen (¥) and commodity (Gold). DCC-GARCH model has been applied by using R language to evaluate the potential of bitcoin as an alternative hedging and diversification tool for the short and long term. The result of this study represents that Bitcoin can be used as an alternative tool for hedging and diversification.