Feasibility Study of Bitcoin Hedging the U.S. Stock Market

Abstract

Hedge strategies are used with different terms to evaluate whether the co-movement between the U.S. stock market and Bitcoin can be used to optimize the portfolio. As for the representative stock indexes, we construct long-term and short-term hedge portfolios of the S&P 500 and NASDAQ with Bitcoin based on the least variance hedging view. It turns out that long-term hedges are less effective than short-term hedges. To further test the correctness of the conclusion, in the context of the recently enacted and implemented double-reduction policy, we take the market value as the weight, select 5 stocks with large market value to build a portfolio, and hedge them with Bitcoin for a week. The conclusion was still in line with our expectations. By testing the feasibility of hedge between U.S. equity and Bitcoin, this research can provide investors with effective investment ideas and reveal the essence of hedge: the assets of the two hedges should have similar volatility.