Introduction
The COVID-19 pandemic, which emerged in early 2020, triggered unprecedented global economic disruptions. Central banks and governments worldwide implemented expansive monetary and fiscal policies to mitigate the crisis. Amidst this uncertainty, Bitcoin emerged as a speculative asset attracting "safe-haven" capital, with its price surging over 300% in 2020—outperforming gold’s 25% rise. This study analyzes Bitcoin’s return volatility using GARCH models to provide actionable insights for investors navigating speculative assets during crises.
Literature Review
1. Bitcoin’s Monetary Attributes
- Caldararo (2021): Highlights Bitcoin’s advantages (global transaction efficiency) but notes vulnerabilities like hacking risks.
- Kaponda (2022): Dubs Bitcoin "digital gold" due to scarcity and decentralization.
- Chinese Scholars (e.g., Li Dong & Huang Xiangbin): Argue Bitcoin lacks credit mechanisms to become legal tender, remaining a speculative asset.
2. Risk Characteristics
- Price Volatility: Studies (Klein et al., 2018) reveal asymmetric volatility—positive returns correlate with higher volatility.
- Bubble Risks: Bianchetti (2019) and Liu Yuyan (2020) empirically confirm Bitcoin’s price bubbles using PSY and LPPL models.
3. Regulatory Measures
- Global Consensus: Jafari (2021) advocates comprehensive legal frameworks to manage risks like money laundering.
Methodology
1. Data
- Source: Daily Bitcoin closing prices (2015–2021) from cryptocurrency exchanges.
- Metrics: Log-return calculation:
[
r_t = \ln(P_t) - \ln(P_{t-1})
]
2. Models
- GARCH(1,1): Captures volatility clustering.
- APARCH(1,1): Evaluates leverage effects (asymmetric shocks).
Key Findings
Volatility Clustering:
- ARCH/GARCH terms were highly significant ((p < 0.01)), confirming persistent volatility post-shock.
Persistence:
- Sum of ARCH + GARCH coefficients ≈ 0.97 (pre-pandemic) and 0.96 (post-pandemic), indicating slow decay of volatility impacts.
Leverage Effects:
- Pre-pandemic: No significant leverage effect ((γ = -0.02), (p > 0.05)).
- Post-pandemic: Positive leverage ((γ = 0.15), (p < 0.05)), showing heightened sensitivity to negative news (e.g., pandemic escalation).
Conclusion
Bitcoin exhibited heightened volatility and risk sensitivity during COVID-19, with post-pandemic returns disproportionately affected by adverse shocks. Investors should:
- Monitor macroeconomic indicators for early volatility signals.
- Diversify portfolios to mitigate asymmetric risks.
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FAQs
Q1: Why did Bitcoin outperform gold during the pandemic?
A: Bitcoin’s decentralized nature appealed as a hedge against inflationary policies, while its liquidity suited rapid capital movements.
Q2: How reliable are GARCH models for crypto volatility?
A: GARCH models effectively capture clustering but should be paired with leverage-aware models (e.g., APARCH) for asymmetric markets.
Q3: What regulatory risks does Bitcoin face?
A: Potential bans or restrictions (e.g., China’s 2021 crackdown) can trigger abrupt price drops.