Shining in or fading out: Do precious metals sparkle for cryptocurrencies?

Abstract

Underlying volatility of cryptocurrency markets motivated this study to unveil the nexus with precious metals using multi-step analysis of GJR-GARCH, quantile connectedness, hedge ratios, hedge effectiveness, and conditional diversification benefits for the period spanning October 3, 2017, to October 27, 2021. Our analysis exhibits higher volatilities at extreme right and left tails, while network analysis demonstrates cryptocurrencies as net transmitters of spillovers and precious metals being the net recipients indicating diversification avenues of precious metals for cryptocurrencies. However, diversification features fade away at extreme tails as markets illustrate higher volatility. Meanwhile, platinum offers the greatest hedge effectiveness, whereas gold is the least effective hedge for cryptocurrencies. Our portfolio management analysis shows that precious metals outperform cryptocurrencies in terms of diversification, especially in times of crisis. This is consistent with research showing that precious metals offer investors a means of flight to safety when the financial markets are unstable. Our findings help cryptocurrency investors understand that precious metals should be considered when allocating weights to their risk portfolios. We devised multiple implications for policymakers, regulatory bodies, investors, and portfolio managers to apply effective risk management tools while investing in cryptocurrencies along with precious metals. Keywords Conditional diversification benefits, Cryptocurrencies, Hedge effectiveness, Precious metals, Quantile connectedness