University of Twente Student Theses


Are cryptocurrencies good hedges against inflation?

Wagenaar, Leon P.M. (2022) Are cryptocurrencies good hedges against inflation?

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Abstract:Since the 1990’s, continuous surges of inflation have not been seen in developed markets, meaning that investors might not be well informed of where to invest their money during times of high inflation. Inflation reduces the purchasing power of consumers and is the cause of many problems. While the performance of asset classes such as stocks, commodities, and fixed income assets during inflationary times has been researched extensively, the performance of newer assets such as cryptocurrencies has not been studied as much. Additionally, this newer asset class has not gone through a period of prolonged inflation. With the recent rise of inflation, both individual and institutional investors might be very interested in the performance of cryptocurrencies during inflationary times. This research aims to find out whether cryptocurrencies possess characteristics which have in the literature been found to be helpful to hedge against inflation. This research was conducted on the two biggest cryptocurrencies by market capitalization, Bitcoin and Ethereum. The cryptocurrencies’ daily returns were followed for a period of 5 years and compared to the daily inflation rate during the same period of time. To analyze the variables over time a Vector Autoregression model was built. Besides this, a regression analysis is conducted, to determine the Fisher coefficient. Finally, a hedging demand variable was calculated. These are indicators of an asset’s inflation hedging ability. While the cryptocurrencies showed tremendous return numbers over the period of time tracked, they did not meet the all the criteria which would, be required for them to be called inflation hedges. All 3 methods employed indicated that when it comes to inflation hedging, cryptocurrencies should not be the asset class to invest in to protect the investor’s purchasing power from inflation, meaning that investors should only invest in cryptocurrencies for speculative purposes.
Item Type:Essay (Bachelor)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:International Business Administration BSc (50952)
Keywords:Inflation hedging, Cryptocurrency, Commodities, TIPS, Bitcoin, Ethereum
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