Gold-Backed Cryptocurrencies as Diversifiers and Hedging Instruments for NFTs, DeFi, and Traditional Cryptocurrencies: Insights from Dynamic GARCH-Copula Analysis

Abstract

This study explores the role of gold-backed cryptocurrencies (PAXG and XAUT) as effective diversifiers, hedges, and safe havens for NFTs and DeFi assets, particularly during market crises such as the COVID-19 pandemic and the 2022 cryptocurrency crash. By employing a dynamic GARCH-copula approach, the research analyzes the interconnectedness and volatility spillovers between these digital asset classes, providing insights into their behavior during times of heightened uncertainty. We also compute the optimal hedge ratio for each gold-backed cryptocurrencies/stabelcoins-NFT/DeFi/Traditional cryptocurrencies pair and evaluate their dynamic hedging effectiveness. The findings reveal that gold-backed cryptocurrencies offer superior hedging capabilities compared to stablecoins (USDT and BUSD), enhancing portfolio diversification and risk management. The results underscore the importance of incorporating gold-backed assets into digital portfolios to improve resilience and achieve better risk-adjusted returns during periods of market turmoil.