Establishing the nature of Bitcoin : A DCC-GARCH analysis

Since its start in 2008 up until the date of this study, Bitcoin has steadily gained considerablyin popularity. However, the digital cryptocurrency still seems to be surrounded by asubstantial amount of mystery as to whether it deserves a spot in anyone's portfolio. Manystudies have tried to pin Bitcoin as a safe haven asset to the likes of gold due to its manysimilarities, such as limited supply with diminishing returns and no cash flows. Otherresearchers have found that Bitcoin is mostly traded for the purposes of speculative trading.This begs the question if Bitcoin shares traits that other speculative investment vehiclesexhibit? There is also the subject of market exposure, it is in the investors interest to knowif Bitcoin’s relationship with different stock market industries differs, as this can affect theperformance of a portfolio. Most researchers have compared Bitcoin against the US or otherglobal markets. Yet few have studied the correlations of Bitcoin with the Swedish market,and none have tried to investigate the correlation against different market segments in theSwedish economy. Thus, the research up to this point has not been clear on how to classifythis new asset. The purpose of this study is to investigate whether Bitcoin resembles a safe haven asset ora high risk asset for different industry portfolios in the Swedish stock market. Goldrepresents the safe haven asset, whereas the Nasdaq-100 index, a commodity-based futureindex, and hedge fund indices represent the speculative assets. Correlations between theassets and the Swedish market will be categorised into cases of particular interest, whereprevious studies are utilised as a guideline. For the method of the study, the DCC-GARCHmodel is applied, which allows for an examination of the dynamic relationships betweenassets’ volatility. An comparison between Bitcoin and the other assets will be made in anattempt to classify the nature of Bitcoin. The presented results indicate that Bitcoin is more speculative in nature due to its highvolatility, returns and unique risk attributes. However, it shares little similarity with theother assets under study. Rather, it exhibits such a deviation from the assets that it shouldtherefore be regarded as a standalone asset. Lastly, the contributions and future suggestionswill be presented.