Diversifying with Cryptocurrencies during COVID-19

Abstract

Literature suggests assets become more correlated during economic downturns. The current COVID-19 crisis provides an unprecedented opportunity to investigate this considerably further. Further, whether cryptocur-rencies provide a diversification for equities is still an unsettled issue. Additionally , the question of whether cryptocurrency futures are safe havens has received very little attention. We employ several econometric procedures , including wavelet coherence, copula principal component, and neural network analyses to rigorously examine the role of COVID-19 on the paired co-movements of six cryptocurrencies, as well as bitcoin futures, with fourteen equity indices and the VIX. We find co-movements between cryptocurrencies and equity indices gradually increased as COVID-19 progressed. However, most of these co-movements are positively correlated, suggesting that cryptocurrencies do not provide a diversification benefit during downturns. Exceptions, however, are the co-movements of bitcoin futures and tether being negative with equities. Results are consistent with investment vehicles that attract either more informed or more speculative investors differentiating themselves as safe havens.