This study aims to examine the properties of four major cryptocurrencies and how they can be used as a simpler alternative mode of hedging foreign exchange (FX) risks as compared to existing mainstream financial risk management techniques.
This study uses a combination of visual data representations and the classic Fama and Macbeth (1973) two-pass procedure regressions.
The findings show that cryptocurrencies can be a more effective hedge against FX risks as compared to other common hedging instruments and/or techniques such as gold or a diversified currency portfolio.
The conclusions were arrived at based only on a small group of cryptocurrency, i.e. Bitcoin, Ethereum, Litecoin and Ripple. Other cryptocurrencies such as Dogecoin or ZCash might exhibit different properties.
Cryptocurrencies can be cost-effective and cost-efficient instruments that provide a solid hedge for investors and/or firms that are exposed to global FX volatility. Its ease of trade and virtually zero barriers to entry makes it an easily accessible alternative hedge instrument as compared to more complex items such as derivatives.
If cryptocurrencies are to be accepted into mainstream usage, a detailed examination of its various uses is necessary. In particular, as they are often touted to be the future of currency, its properties and price behavior relative to other mainstream financial instruments need to be well-understood, not only by finance professionals but also by laypersons.
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