Altcoins as safe havens for bitcoin investors

Abstract

Purpose

This paper aims to improve how investors can better manage their exposure to bitcoin (BTC), given the growing importance of BTC and the accompanying high volatility of BTC. This paper tests whether altcoins can serve as safe havens and diversifiers against exposure to BTC.

Design/methodology/approach

Using daily returns of altcoins and BTC from 2014 to early 2022, this paper examines the relationship between altcoins and BTC in a GARCH regression framework.

Findings

This paper finds that altcoins act as reliable safe havens during periods of extremely negative BTC returns and provide BTC investors with diversification benefits during normal periods. The safe haven effect of altcoins is superior to that of conventional assets. This paper presents evidence that this safe haven property of altcoins can be attributed to the informational efficiency channel, which arose from the increased adoption of BTC by institutional investors.

Research limitations/implications

The study uses a data set from 2014 to early 2022. While the sample is among the largest samples in the literature on crypto assets and includes adequate BTC tail events to test the hypotheses, it may not capture more recent changes in the crypto markets.

Practical implications

The findings suggest that BTC investors can enjoy diversification and safe haven protections by including altcoins in their portfolios.

Originality/value

This paper’s focus on alternative cryptocurrencies (altcoins) as potential diversifiers and safe havens is original. The hypothesis about altcoins being better alternatives during extreme negative movements in BTC prices is a unique contribution. The test of the role of the information efficiency channel further enhances the paper’s originality.

Citation

Cai, J. and Pinto, G. (2024), "Altcoins as safe havens for bitcoin investors", Studies in Economics and Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/SEF-01-2024-0026