An Empirical Analysis of Cryptocurrencies with Traditional

Currency and Commodity Markets

School of Accounting, Economics, and Finance

Collage Of Law and Management Studies

University Of KwaZulu Natal

Honours Case Study FINA7IB

By

NAME STUDENT NUMBER

Ngwane Sanelisiwe 219095667
Sithole Nkululeko 217063025
Mthembu Ndumiso 218054920
Ziqubu Mfundo 219063901
Cebekhulu Njabulo 219035168
Memela Amahle 219009025
Nyandoro Chelsea 217055254
Barakamfitiye Safi 217046833
ABSTRACT
This case study evaluates the cryptocurrency framework, its potential ability to replace
traditional (fiat) currencies, and its ability to challenge or complement mining commodities
as safe-haven assets from 2014 to 2022. This study used a time series dataset to examine the
potential of cryptos to replace fiat currencies. To begin, the study uses four major volatile
cryptocurrencies, 2 fiat currencies, 2 mining commodities as well as 2 market stock indices.
The data was obtained from investment.com. To investigate the aim of this study, this study
used serial correlation tests, ARCH LM, normality tests, and stationarity tests.

Keywords: Cryptocurrencies, Traditional Currency, Commodity Markets

TABLE OF CONTENTS
ABSTRACT............................................................................................................................................2

2. LITERATURE REVIEW.................................................................................................................5

2.1 THEORETICAL REVIEW........................................................................................................6

2.1.1 Advantages and Limitations of Cryptocurrencies.............................................................6

Advantages.....................................................................................................................................6

Limitations......................................................................................................................................6

2.1.2 Traditional Currency vs Cryptocurrency..........................................................................7

Transactions...................................................................................................................................8

Functions.........................................................................................................................................9

Risk exposure...............................................................................................................................10

2.2 EMPIRICAL REVIEW............................................................................................................10

Cryptocurrencies for Volatile Financial Markets Before and During Covid-19...................10

3. DATA AND METHODOLOGY....................................................................................................12

4. RESULTS AND DISCUSSION.....................................................................................................14

4.1 Data Analysis..............................................................................................................................15

4.2 Empirical Results.......................................................................................................................19

5. CONCLUSION AND RECOMMENDATION.............................................................................24

REFERENCES.....................................................................................................................................24
1. INTRODUCTION

When American cryptographer David Chaum published a conference paper explaining an

early type of anonymous cryptographic electronic money in 1983, the concept of
cryptocurrencies first came to light (Jones 2022). The idea was to create a kind of money that
could be distributed anonymously and without the need for centralized organizations (i.e.,
banks). Based on his original concepts, Chaum created a prototype cryptocurrency called
DigiCash in 1995. Before money could be delivered to a destination, it needed certain
encryption keys and use software to withdraw money from a bank (Jones, 2022). It can be
used in exchange for products, services, and investments in a manner like fiat currencies.
Governments issue fiat currency, like the existing monetary system. The core tenet of
cryptocurrency value is that if enough people believe it to be valuable, then its value will
increase (Helter, 2022). A national currency that is not linked to the price of a good like gold
or silver is known as a fiat currency. Fiat money's value is mostly determined by the public's
confidence in the currency's issuer, which is typically the government or central bank of that
nation (IG, 2022).

The first innovation in the financial system to be created outside of financial institutions and
even without any collaboration with them is cryptocurrency. It is inventive, straightforward,
and does not rely on the current financial systems. Additionally, it threatens the stability of
the financial system. As a result, many market regulators, including nations and international
financial organizations, see this system as primarily a threat to their income and widely
accepted power and authority (Miciula, 2019). Bitcoin, which was developed by an
unidentified programmer or group of programmers under the moniker Satoshi Nakamoto,
helped cryptocurrency gain popularity in 2008.

Cryptocurrencies have gained popularity since the release of Bitcoin in 2009. People that
need to transmit money across borders without interference from banks or governments are
using Bitcoin more and more frequently (Nigeria, 2021). Through cryptocurrencies, the
world's first decentralized currency was created. Competing cryptocurrencies began to enter
the market in 2011, with the introduction of Litecoin, Namecoin, and Swiftcoin, to mention a
few (Cavendish, 2022). These new digital currencies' costs fluctuated in line with Bitcoin's.
Even though its functionality is constrained, Bitcoin was slower than some of its competitors.
Its market share, which dropped from 81% in June 2016 to 40% nearly two years later,
reflects this decline (Mazer, 2022). During this time of volatility, many people lost hope in
cryptocurrencies as an avenue for investing. However, cryptos started to experience
exceptional growth starting in late 2017. Before falling later that month, the combined market
capitalization of all cryptocurrencies had hit $820 billion in January 2018. The
cryptocurrency market has grown consistently despite this crisis (Nigeria, 2021).

Networks of specialized computers create and release new Bitcoin through the mining
process, which also verifies new transactions (Coinbase, 2022). It is the method used by
Bitcoin and many other cryptocurrencies to create new coins and validate new transactions. It
makes use of sizable, decentralized computer networks that verify and safeguard blockchains
globally. The network's computers receive new coins in exchange for using their processing
power. It is a positive feedback loop: the miners protect and secure the blockchain, the
blockchain distributes the coins, and the coins provide the miners' incentive to protect and
secure the blockchain (Coinbase, 2022). However, crypto mining also entails adding bitcoin
transactions to a distributed ledger and validating them on a blockchain network.

The most significant benefit of crypto mining is that it stops dispersed network users from
spending digital currency twice. A digital currency faces difficulty since it is simple to
manipulate digital systems. Therefore, only verified miners are permitted to update
transactions on the digital ledger using Bitcoin's distributed ledger (Freemanlaw, 2022). As a
result, miners now have the additional duty of protecting the network against double-
spending. The majority of cryptocurrency mining software includes a mining pool, but
nowadays, crypto enthusiasts can also sign up online to build their mining pools. Miners are
free to switch pools whenever they need to since some pools give higher rewards than others
(Freemanlaw, 2022).

Based on the above overview of cryptocurrencies and digital mining, to create sufficient
computational processing power and distribute rewards to participating stakeholders, miners
can join cryptocurrency mining pools utilizing applications like the Bitcoin miner or
MinerGate Mobile Miner. The objective of our case study is to evaluate the cryptocurrency
framework, its potential ability to replace traditional (fiat) currencies, and its ability to
challenge or complement mining commodities as safe-haven assets.
2. LITERATURE REVIEW
This study's literature review includes both theoretical and empirical literature. The
theoretical literature review discusses the advantages and limitations of cryptocurrencies and
the comparison between traditional Currency and cryptocurrency characteristics. The
empirical literature incorporates the research conducted by various authors on
cryptocurrencies as a haven during Covid-19, and their findings are used to analyze which
cryptocurrencies are more volatile before and during Covid-19. Scrutinizing the different
papers assist in determining the various macroeconomic factors that can be utilized for
empirical analysis.

2.1 THEORETICAL REVIEW

2.1.1 Advantages and Limitations of Cryptocurrencies
Advantages

There are numerous advantages to using and creating cryptocurrencies. Cryptocurrency can
be used by anyone. All that is required is a computer, smartphone, and an internet connection.
Comparing the process of creating an account at a conventional financial institution to that of
setting up a bitcoin wallet, the latter is incredibly quick. There is no need to verify your ID
(Bylund, 2022). Most cryptocurrency payments settle in minutes, and some even in seconds.
In contrast, bank wire transfers can be much more expensive and frequently take three to five
working days to complete. However, several things affect cryptocurrency mining. The mining
rig's hash rate, electric power consumption, and overall costs are the most crucial aspects to
consider regardless of whether a prospective miner opts for CPU, GPU, ASIC, or cloud
mining (Freemanlaw, 2022).

The asset class of cryptocurrencies is currently recognized as being uncorrelated.

Theoretically, cryptocurrency markets operate mostly independently of other markets, and
their price movement is typically influenced by reasons different from those that drive stocks,
bonds, and commodities (Nibley, 2022). The primary benefit of cryptocurrencies is that they
do not require a central bank to coordinate their operations to function. There is no financial
flow produced when it comes to cryptocurrency. The investor only stands to win if they can
locate a buyer of the currency who is prepared to make a greater offer. Due to this,
cryptocurrency investors are susceptible to market whims (MSG, 2022).
Limitations

The majority of transactions are irreversible since there is no single exchange or central bank
that controls all of them. The money in the digital wallet may become unavailable to the
owner if they remove these passwords and are unable to retrieve them on their own, and there
will also be data loss. Cryptocurrency investments are held in digital wallets with password
security (MSG, 2022). According to Sanger, it is common practice to analyze the danger of
double-spending attacks on proof-of-work-based cryptocurrencies without accounting for
many attackers or endogenizing attackers' motivations (2019). He went on to argue that
because they cannot securely settle massive transaction volumes, cryptocurrencies cannot be
used as a replacement for an established payment system. The bitcoin transaction market
cannot produce an adequate "level of mining" revenue through fees since users are allowed to
ride on the fees of other transactions in a block and on the future blockchain. Instead, block
rewards, which are newly minted bitcoins, have made up the majority of mining earnings to
this point (Auer, 2019).

The limitations of cryptocurrencies are much more significant, and they are connected to the
possibility of money laundering, financing terrorism, and other illegal acts, claim Bunjaku et
al. (2019). This means that in the event of bankruptcy or another similar circumstance, there
is no legal entity to provide a guarantee. Many academics and industry professionals on the
issue feel that cryptocurrencies have a bright future because they will remove trade barriers
and middlemen, cut transaction costs, and hence increase trade and the economy. However,
this is very difficult to forecast.

2.1.2 Traditional Currency vs Cryptocurrency

Traditional currency is a type of money that is centralized, supported, and maintained by a

recognized government agency, such as the US Federal Reserve or the SARB (TradeStation,
2020). It is acknowledged as a medium of trade, a store of value, and an accounting unit.
However, money also represents a social bond that ensures a community's coherence by
allowing transactions and assigning monetary worth to things within that society (Orzi,
2017). The value of fiat money is determined by the relationship between supply and demand
as well as the stability of the issuing government, rather than the value of the commodity
supporting it (Chen, 2022). Fiat money runs the danger of depreciating owing to inflation or
possibly losing all of its value in the event of hyperinflation since it is not backed by actual
reserves like a national stockpile of gold or silver (Anderson, 2022). The rate of inflation can
double in a single day in some of the worst cases of hyperinflation, such as in Hungary soon
following World War II. Furthermore, a country's currency will lose value if people stop
believing in it. Although the idea of digital money has been around since the late 1980s, the
first decentralized cryptocurrency to be a success is Bitcoin, which was introduced in 2009 by
the mysterious (and as of yet unidentified) creator Satoshi Nakamoto (Corbet et al., 2020).

Cryptocurrency is a type of money that is decentralized, not supported unlike traditional

currency, or maintained by a recognized government agency, such as the US Federal Reserve
or the SARB. A cryptocurrency, or virtual money, allows users to make virtual payments for
products and services without the use of a centrally controlled, dependable authority.
Cryptographic techniques are used by cryptocurrencies to secure valid, one-of-a-kind
transactions. Cryptocurrencies rely on the transmission of digital information. By
decentralizing the currency and releasing it from hierarchical power structures, Bitcoin
advanced the digital coin market. On a peer-to-peer network, people and companies instead
exchange the coin electronically (Farell, 2015).

The market for cryptocurrencies has expanded quickly. This market enables businesses to be
traded without being listed on stock exchanges and to raise funding without working with
venture capitalists. The full spectrum of cryptocurrencies available on the crypto market
includes well-known ones like Bitcoin, Ethereum, and Ripple as well as considerably less
popular ones. On the cryptocurrency market, there are two points of view. The majority of the
coins—possibly all of them—represent fraud and inflated values, to start. The second is that
the blockchain technology embedded in coins may prove to be a significant innovation and
that some coins may be investments in the future of this technology (Liu et al., 2022).

Transactions

There is a possibility of currency freezing because the traditional currency is only operational
five days a week and because of transaction restrictions. Users must disclose their names,
addresses, phone numbers, and many other personal details to conduct transactions using a
traditional currency system. Therefore, a hostile user will be able to quickly breach the
account information of the traditional money system using internet technology (Qrius, 2020).
Every transaction involving cryptocurrencies is documented as blocks in a blockchain, a
sizable open ledger. All cryptocurrency users will be aware of the transaction details because
they are public, but the user's identity will never be revealed, ensuring their anonymity. A
national transaction would take two to three working days to complete in a regular banking
system, and there would be significant transaction costs. It will take 15 days to process an
international transaction, and the transaction charge will be significantly greater. A national
transaction in a cryptocurrency network like bitcoins is free of transaction fees. Due to the
24/7 operation of the bitcoin system, the transaction will likewise happen instantly or within
24 hours. There will be a small transaction fee associated with conducting an international
transaction (NDTV Business Desk, 2022). This indicates that compared to regular currencies,
cryptocurrencies have substantially lower transaction costs.

Functions

The ability to be used as a medium of exchange is one requirement for a financial instrument
to be classified as a currency, but it is not specified to what extent settlements should be
accepted or what the settlement turnover should be (Carrick, 2016). Therefore, if it is
guaranteed that they will also be able to utilize cryptocurrencies for their payment reasons in
the future, the number of settlement points should be big enough that a cryptocurrency
market participant would accept a settlement with this instrument.

According to the theoretical definition of money, "any asset that is universally accepted for
payment for goods or services, or the settlement of debts," qualifies as money. Concerning
Bitcoin, the definition's criteria for widespread adoption are not met. Even though the usage
of Bitcoin is growing, we cannot discuss widespread acceptance. Defining the Bitcoin
community of users who accept Bitcoin as money is necessary if we want to make a case for
it (Revenda et al., 2005).

The requirements for inclusion in the category of electronic money are not met by Bitcoin (as
a proxy for cryptocurrency), which are the representation of a claim to the issuer, storing on
an electronic means of payment, issuance against receiving of funds in the value not less
than the value of issued electronic money, acceptance as means of payment by persons other
than the issuer. We cannot refer to bitcoins as a claim by the owner against the issuer since,
as was already said, they do not appear as a liability on the balance sheet of the issuer. The
requirement that issuing electronic money be contingent upon receiving cash draws attention
to this issue. Such a transaction never takes place (Kubat, 2015). However, the decision of
market players will determine if cryptocurrencies are used as a medium of exchange.
Therefore, how to grow this network and draw in additional users is one of the key
difficulties when evaluating the potential of cryptocurrencies as global currencies.

To sum it all up, there are major limitations that restrict cryptocurrencies to assume the role
of fiat currencies as a store of value, unit of account, and medium of exchange due to
anonymity meaning fewer regulations, the need to grow the cryptocurrency markets and the
reluctancy of the greater population in the use of digital fiat currency in general.

Risk exposure

The most important stylized fact associated with financial data is volatility. This is because it
establishes how risky an asset is. Greater volatility denotes greater risk and a greater chance
of suffering losses. Efficiency and volatility are inextricably linked since volatility is a
function of variance from market returns, persistence is the amount of time it takes for a trend
to peter out, and efficiency is a function of market returns. The impact of price shocks and
volatility is supposed to fade away quickly in an efficient market.

In a study performed by Kaseke et al. (2022), it was found that in developing countries,
through the use of the JSE, Bitcoin and Ethereum as a proxy for fiat currencies and
cryptocurrencies respectively, bitcoin has more volatility and higher volatility persistence
than the JSE market. They also demonstrate that, in the absence of structural fractures,
persistence for cryptocurrencies is overstated. The JSE was the exact opposite. Additionally,
it was discovered that the volatility charts of the two cryptocurrencies varied from those of
the JSE and are nearly identical. Periods of high volatility on the cryptocurrency market did
not correlate with those on the JSE, and vice versa. In contrast to the regular leverage impact
of the JSE market, there is evidence of an inverse leverage effect in cryptocurrencies.
Furthermore, in timelines including market shocks (i.e., the 2017 cryptocurrency market
crash), it was discovered that markets for Bitcoin and the majority of the altcoins that were
studied are both highly efficient and volatile, especially in the immediate aftermath of a fall.

Volatilities are more likely to last for a shorter time than they did before the crash (Yaya,
2021). When comparing the BTC/USD market to the S&P 500 index, they seem to exhibit
different regime volatility and persistence patterns: the S&P 500 exhibits lower volatility on
the bull states and greater state persistence, whereas the BTC/USD, exhibits volatile bull and
bear states and generally weak state persistence (Suda and Spiteri, 2019).
2.2 EMPIRICAL REVIEW
Cryptocurrencies for Volatile Financial Markets Before and During Covid-19

Approaches to determine whether cryptocurrencies can be used as a haven for volatile

financial markets, such as stock markets during the COVID-19 crisis have been extensively
researched in the literature. Vukovic, Maiti, Grubisic, Grigorieva, and Frömmel (2021)
investigated whether the crypto market is a safe haven during the first wave of Covid-19
using the OLS, quantile, and robust regressions estimates and confirmed that there was no
statistical significant direct influence of the COVID-19 crisis on the crypto market in the first
wave period. In 2020 Conlona, Corbetb, and McGee's study tested the properties of Bitcoin,
Ethereum, and Tether from the perspective of international equity index investors in the
equity market during Covid but found that bitcoin and Ethereum are not a safe haven for the
majority of international equity and their inclusion in portfolio downside risk. Similarly,
Boadu, Owusu, Adam, and Adjei (2022) empirical evidence revealed that gold and
cryptocurrencies offer investors a haven, diversification, and hedge, particularly in the
Ghanaian stock market (short-term) in Africa and also throughout the COVID-19 period.

Ozdemir and Abidin (2021) argue, that the hedging effectiveness of gold, Bitcoin, and crude
oil varies over time before the Covid-19 pandemic and only Bitcoin is acting as a haven
against G-7 stock markets. Raifu and Ogbonna's (2021) empirical results for haven assets
using the Sharpe ratio index obtained from return and volatility spillover indices to individual
assets revealed that the selected cryptocurrencies (Bitcoin, Bitcoin Cash, Ethereum, Ripple,
and Tether) were found to be majorly diversifiers (haven) in periods of normalcy
(crisis/pandemic). Hong and Yoon (2022) further test cryptocurrencies and only Ethereum
and Qtum were the most influential cryptocurrencies during the post-covid-19 period.
However, according to Maghyereh and Abdoh (2022), bitcoin and financial assets are weak
or negative before the pandemic while they become positive during the pandemic times for
most of the assets.

Using OLS regression, Manzil and Jeribi (2020) give evidence of stock market behavior and
discover that Ethereum diversifies the stock market while Bitcoin acts as a hedge. However,
during COVID-19, Bitcoin and Ethereum are unable to help financial investors through
portfolio diversification and hedging measures. Additionally, Dash, Monero, and Ripple
serve as diversifiers and hedges before the COVID-19 breakout. In 2022, Melki and Nefzi
discovered that Ripple has the potential to function as a flimsy safe-haven asset for the forex
market amid the pandemic crisis using a logistic smooth transition regression model
(LSTR2). Khalid, Rubbaniy, and Samitas's paper from 2021, which employs a wavelet
coherence framework, further supports the idea that long-term investors may engage in the
cryptocurrency market to reduce their risk exposure. Additionally, the results indicate that
cryptocurrencies behave like traditional assets during the Covid-19 pandemic when measured
against a financial market-based proxy of market instability.

Wang, Zhang, Li, and Shen (2019) evaluated the use of bitcoin as a safe haven or hedging
asset by examining the mean and volatility spillover effects between bitcoin and significant
assets and empirical results suggest that bitcoin has a high rate of return, high volatility, and
weak correlations with other assets. In 2020 Wang, Zhang, Li, and Shen further investigated
bitcoin by evaluating how it is impacted by economic policy uncertainty, the results show
that the returns around the highest economic policy uncertainty are significantly greater than
those around the lowest economic policy uncertainty. In a copula-quantile causality approach,
Bouri, Lau, Lucey, and Rounbaud (2019) show evidence by connecting trading volume to
returns and volatility in the cryptocurrency market pre-Covid-19. The results demonstrate that
trade volume Granger produces extremely bad and good returns for all the cryptocurrencies
under consideration. The results were obtained using daily data from seven popular
cryptocurrencies (Bitcoin, Ripple, Ethereum, Litecoin, Nem, Dash, and Stellar). However,
when volatility is low, volume Granger only affects the return volatility of Litecoin, Nem,
and Dash. According to Mandaic and Cagli (2022), causality results show that herding has a
significant effect on market volatility.

3. DATA AND METHODOLOGY

To evaluate the cryptocurrency framework, its potential ability to replace the traditional (fiat)
currencies, and its ability to challenge or complement the mining commodities as safe-haven
assets. The daily time series consisting of four major volatile cryptocurrencies, 2 fiat
currencies, 2 mining commodities as well as 2 market stock indices were used. The chosen
analysis is a good representative of the extremely volatile cryptos, fiat currencies,
commodities, and indices that fit the criteria of this study to examine the potential of cryptos
to replace fiat currencies.

Table 1: Data used and its source

 Name Data Source
Bitcoin Investment.com
Litecoin Investment.com
Cryptocurrencies Dogecoin Investment.com

Ripple Investment.com

Fiat Currencies EUR/USD Investment.com

GBP/USD Investment.com
Commodities Crude oil Investment.com
Natural Gas Investment.com
Stock market indices S & P 500 Investment.com
Dow Jones (US 30) Investment.com

The study's period covers the period from January 1, 2014, to October 31, 2022, accurately
capturing the effects of the coronavirus pandemic in 2019. This allows for efficient research
and comprehension of unexpected economic shocks and large regime changes. This 8-year
data set enables the study to draw reliable statistical conclusions. Bitcoin was developed in
2009, Litecoin in 2011, Ripple in 2012, and Dogecoin in 2013 towards the end of the year in
December, which influenced the study period to start in 2014, to achieve balanced data for
better comparison. This sample period comprises all of the daily prices for the entire year,
which enhances the quality of the data. Only an in-sample data set is included in the entire
data collection. The log transformation formula, which is given by: was used to change the
daily price data into the daily return

Rt =ln ⁡¿ ) (1)

where Pt , the share price index at period t, and Pt −1 , the share price index in period t-1, are
divided by the natural logarithm of Pt , the share price index at period t, to determine Rt , the
daily return. In the analysis, the diagnostic tests were carried out initially, including serial
correlation tests, ARCH LM, normality tests, and stationarity tests. Due to the existence of
ARCH effects (Nelson, 1991), the adoption of GARCH models such as GARCH (Bollerslev,
1986), GJR-GARCH (Glosten et al., 1993), and E-GARCH was supported. As a result of the
significant autocorrelation in squared returns, Engle introduced the ARCH model. The
GARCH model was then developed by Bollerslev. The main advantage of the GARCH
model is that it performs better than the ARCH model and has a lot fewer parameters. Engle's
(1982) ARCH model's drawbacks, such as the need for several parameters and lengthy lag
times, are addressed by the GARCH models. The GARCH model estimated consists of two
equations, the mean and variance equations allowing for the study of the risk-return
relationship. The mean equation was specified as:

2
y t =μ+φ y t −1+ ρ ε t−1 + ν σ t−1 +ε t ,(2)

where the effects of earlier returns and shocks are represented by ρ and φ respectively. This
mean equation specification was assumed for each of the three GARCH variations used in
this study. On the other hand, persistence, mean reversion, and leverage effects were
estimated using three different variance equations to examine the underlying characteristics
that reflect the nature of volatility.:

q q
σ 2t =ω 0+ ∑ α j ε 2t− j+ ∑ β i σ 2t− j(3)
j=1 i=1

q p
σ =α 0+ ∑ α u
2
t
2
i t −1 + ∑ β j σ 2t− j+ γ u2t −1 I t−1 (4)
i=1 j=1

[√ √ ]
|ut −1|
p q
u t−1 2
ln ( σ t ) =ω+ ∑ β j ln ( σ t −1) +γ +∑ αi
2 2
− (5)
j=1 √σ 2
t −1
i=1 σ
2
t−1
π

Where equations (4), (3), and (5), respectively, are the GARCH (1.1), GJR-GARCH (1.1),
and E-GARCH (1.1) variance equations. ω is a constant, ⍺ captured the effect of past
shocks, σt 2 is the conditional variance, ε 2t−n is the lagged squared residual from equation (2),
and λ captures the impact of prior shocks on current volatility. In light of the modest GARCH
specification claim made by Bollerslev et al. in 1994. Validation of the number of lags
chosen was done using tests for model adequacy. The volatility persistence β+λ was used to
evaluate the degree of dependence in volatility across time (Brooks, 2019). If volatility is
mean reverting, the persistence in volatility should be smaller than one. Conditions for
nonnegativity in the variance equation (w > 0, β > 0, λ > 0, and β + δ ≥ 0) and stationarity
condition (β – λ < 1) should hold for the model to be admissible (Brooks, 2019).

Equation (3) can capture aspects of volatility like persistence, but it is unable to account for
the effects of leverage. Current volatility may be affected differentially or asymmetrically by
shocks of the same size, both positive and negative. If these leverage effects are ignored, the
standard GARCH model may not be able to accurately evaluate the underlying nature of
 volatility. St −1 is a newly added dummy variable that takes the value of 1 if the shock at time
t - 1 is negative and zero otherwise. Equation (4) effectively captures the volatility's
imbalanced responses to positive compared to negative shocks. The existence of the leverage
effect and the assumption that negative shocks increase volatility more than positive shocks
are both supported by strong and compelling evidence.

4. RESULTS AND DISCUSSION

4.1 Data Analysis

Table 2: Descriptive statistics and Stationarity tests

Mean (%) Median Std. Dev (%) Kurtosis J-B ADF

(%) Skewness
Cryptocurrency
Bitcoin 0.00137 0.001514 0.038915 -0.334790 8.509517 2839.021 -58.43154***
Ripple 0.001006 -0.002608 0.065648 2.440559 41.60803 139577.7 -56.13792***
Litecoin 0.000462 -0.001330 0.057380 0.508929 15.57239 14663.82 -58.24905***
Dogecoin 0.000937 -0.002441 0.066849 1.299034 1522547 14397.55 -30.23523***
Fiat Currency
EUR/USD -0.000144 -8.25E-0.5 0.004944 0.040684 5.300258 508.3689 -48.49458***
GBP/USD -0.000160 -0.000119 0.005894 -1.373397 23.20378 39893.49 -45.91492***
Commodities
Crude oil -5.66E-05 0.000874 0.047118 -0.521708 39.87221 131869.5 -24.36761***
Natural Gas 0.000175 0.000000 0.033419 0.035942 6.605904 1260.122 -50.05743***
Stock Market Commodities
S&P 500 0.000337 0.000602 0.011426 -0.897396 19.59436 25804.76 -14.96588***
DOW JONES 0.000349 0.000605 0.010929 -1.116786 31.01312 70976.44 -14.54930***
***, **, * denotes significance at 1%, 5% and 10% significance level. The critical values for ADF and KPSS
were obtained from McKinnon (1996)

Table 3: Serial Correlation and ARCH Effects Tests

Serial Correlation ARCH Effects

LB Statistic Breusch- Godfrey LB2 Obs*R-Squared
Bitcoin 52.845** 54.35965** 124.20*** 92.51646***

Ripple 85.470*** 78.31336*** 482.15*** 305.3639***

Litecoin 69.439*** 70.22614*** 242.16*** 145.0038***

Dogecoin 63.510*** 65.85390*** 220.18*** 165.8998***

EUR/USD 47.672* 48.37025* 661.22*** 227.0975***

GBP/USD 24.833* 24.61276* 130.94*** 106.7471***

Crude oil 343.10*** 505.4919*** 641.16*** 563.1273***

Natural Gas 60.197*** 67.02798*** 765.22*** 266.4080***

S&P 500 388.93*** 217.5425*** 3447.7*** 927.9275***

DOW JONES 483.13*** 276.4787*** 3263.2*** 922.0697***

Source: Authors’ extract from EViews (2022): ***, **, and * denote significance at the 1%, 5%, and 10%
levels, respectively.

FIAT CURRENCIES

STOCK MARKET INDICES

CRYPTOCURRENCIES
COMMODITIES

Sou
rce: Authors’ extract from EViews (2022)

The graphs above show the plots of return series for four major cryptocurrencies, two fiat
currencies, two commodity markets, and two stork market indices, where there is evident
clustering of the volatility, indicating that the volatility may be forecasted. It can be shown
that fluctuations in volatility over time tend to cluster financial returns, which is also a sign of
long memory. In other words, it's common for big changes to be followed by bigger changes,
and vice versa for small changes to be followed by smaller changes (Amudha and
 Muthukamu, 2018). All graphs are extremely volatile except for Crude oil. This is due to the
substantial decrease in crude oil prices from 2014 to 2016, which highlights the increased
level of uncertainty in the crude oil market. Thus, given the crucial role that crude oil plays in
the global economy, the issue of controlling the oil price risk is one that economists,
policymakers, and other market participants are very eager to address (Oyuna and Yaobin,
2021).

GARCH(1,1) GJR-GARCH(1,1) EGARCH(1,1)

AIC Normal T GED Normal T GED Normal T GED

Cryptocurrency
Bitcoin -3.782412 -4.091223 -4.091108 -3.770391 -4.075671 -4.074198 -3.779395 -4.084977 -4.082249

Ripple -3.079917 -3.445497 -3.427931 -3.070915 -3.427968 -3.409122 -2.624125 -3.430961 -2.621618

Litecoin -3.083225 -3.488384 -3.465569 -3.067664 -3.472741 -3.449175 -2.892894 -3.482639 -2.890387

Dogecoin -2.894639 -3.358182 -3.332269 -2.881331 -3.340616 -3.123898 -2.878976 -3.340919 -3.315763

Fiat Currency
EUR/USD -7.923269 -7.953314 -7.948428 -7.904904 -7.930597 -7.926037 -7.902454 -7.928017 -7.923941

GBP/USD -7.609583 -7.674551 -7.666213 -7.589002 -7.651596 -7.642901 -7.590786 -7.656093 -7.645211

Commodities
Crude oil -3.734248 -5.204307 -5.064739 -3.713754 -5.181197 -5.054293 -3.716331 -5.230374 -5.012424

Natural Gas -4.205934 -4.243048 -4.236022 -4.185432 -4.220788 -4.213272 -4.179678 -4.220883 -4.211702

Table 4: Information Criterion

Source: Authors’ extract from EViews (2022): Chosen model by SBIC Information Criterion in Bold

For cryptocurrencies, fiat currencies, and commodities, this table measures the information
requirements of SBIC under the three error distributions (Normal, student's T, and GED
distributions). Due to SBIC's strong consistency, which favors large samples, and the time
series' choice of 3223 daily observations being regarded as large, it will asymptotically
produce the right model. The results demonstrate that all cryptocurrencies and commodities,
except Litecoin, fell under the Generalized Error Distribution (GED), while all fiat currencies
fall under the Normal Distribution. Due to the non-negativity requirements of GARCH
models, all currencies and commodities behaved as predicted by the GARCH(1,1) model.
The study's data were very explosive for EGARCH, hence EGARCH could not be used to
model the study's data.
 GARCH(1,1) GJR-GARCH(1,1) EGARCH(1,1)
SBIC Normal T GED Normal T GED Normal T GED

Cryptocurrency
Bitcoin -3.783553 -4.161293 -4.158317 -3.767863 -4.139527 -4.135543 -3.772952 -4.147809 -4.142182

Ripple -3.104740 -3.506209 -3.491328 -3.090959 -3.482599 -3.467893 -3.066041 -3.483023 -3.465649

Litecoin -3.044024 -3.580175 -3.555017 -3.022974 -3.557124 -3.534191 -3.024270 -3.564910 -3.422292

Dogecoin -3.127275 -3.415155 -3.398615 -2.445039 -3.391672 -3.374971 -3.115841 -3.393779 -3.378059

Commodities
S&P 500 -6.972584 -7.060434 -7.059909 -6.999910 -7.070812 -7.068644 -7.019070 -6.585036 -7.077301

Dow jones -7.001998 -7.089533 -7.089753 -7.030761 -7.098725 -7.097117 -7.042530 -7.098877 -7.100161

Table 5: Information Criterion Before Covid-19

The information criterion in Table 5 above compares the GARCH models and their error
distributions for all of the cryptocurrencies and commodities. The results show that one
model cannot be applied to all of the indicators in our investigation. The selected
cryptocurrencies Bitcoin, Litecoin, and Dogecoin will model the data using the GARCH
(1,1), student's t distribution except for all the commodities and Ripple. The table also shows
that the Student's T distribution is the optimal error distribution model for all of our indices.

GARCH(1,1) GJR-GARCH(1,1) EGARCH(1,1)

SBIC Normal T GED Normal T GED Normal T GED

Cryptocurrency
Bitcoin -3.810004 -3.944901 -3.918159 -3.767759 -3.897520 -3.902427 -3.775570 -3.900699 -3.873838

Ripple -3.048405 -3.318002 -3.295493 -3.013516 -3.271219 -3.249840 -3.010237 -3.273496 -3.255246

Litecoin -3.187223 -3.312687 -3.303935 -3.159454 -3.276014 -3.265666 -3.152898 -3.271142 -3.264623

Dogecoin -2.738731 -3.232977 -3.201977 -2.707248 -3.025137 -2.926839 -2.682564 -3.180819 -3.150832

Commodities
S&P 500 -6.043742 -6.077965 -6.065424 -5.988348 -6.025136 -6.005952 -5.992739 -6.049217 -6.042471

Dow jones -6.516738 -6.581136 -6.572122 -6.454986 -6.511544 -6.501447 -6.442824 -6.507088 -6.494724

Table 6: Information Criterion during Covid-19

For our cryptocurrency and stock market indexes throughout CVID-19, this table observes
the information criterion of SBIC under the three error distributions of normal, student's T
distribution, and generalized error distributions (GED). The results demonstrate that not all of
the study's indices can be represented by a single model. Due to SBIC's excellent consistency
and preference for large samples, it will asymptotically offer the proper model given the size
of our time series data (3223 monthly observations). The outcomes show that one model
cannot be applied to every index in our investigation. Except for Dogecoin, which will
employ the GJR-Garch (1,1) with students' T-distribution, all the indices choose the Garch
(1,1) model. While Litecoin, the S&P 500, and Dow Jones chooses the student's T
distribution as the optimum error distribution model, Bitcoin and Ripple utilize the GED.

4.2 Empirical Results

Bitcoin Ripple Litecoin Dogecoin EUR/USD GBP/USD

Selected GARCH(1,1) GARCH(1,1) GARCH(1,1) GJR-GARCH GARCH(1,1) GARCH(
Model GED GED Normal GED Student t Student t

Conditional Mean Equation

μ 5.41E-05 -0.004935 *** -0.002215 -0.022685*** -0.000311 1.14E-05

ν 0.041633 0.074751 *** 0.035800 0.298110*** 0.042674 -0.021047

Φ(AR -0.103037 0.285215 ** -0.833414 *** -0.024371 0.815014*** 0.297445

ρ (MA 0.089589 -0.370558 ** 0.816383 *** -0.041309 -0.838563*** -0.295360

Conditional Variance Equation

ω 6.75E-05*** 0.000183 *** 0.000152*** 0.002070*** 9.09E-08* 9.56E-07**

β 0.848645 *** 0.708996 *** 0.870443*** 0.550631*** 0.955736 *** 0.896162*

⍺ 0.119950 *** 0.287048 *** 0.083697*** 0.106173*** 0.042174*** 0.076521*

γ - - - -0.126382*** -

( β +α ¿ 0,968595 0,996044 0,95414 0,656804 0,99791 0.972683

Table 7: Selected model outputs; Cryptocurrencies Vs Fiat Currencies

 Source: Authors’ extract from EViews (2022): ***, **, and * denote significance at the 1%, 5%, and 10%
levels, respectively.

Table 8: Selected model outputs; Cryptocurrencies Vs Commodities

Bitcoin Ripple Litecoin Dogecoin Crude Oil Natural Gas

Selected GARCH(1,1) GARCH(1,1) GARCH(1,1) GARCH(1,1) GARCH(1,1) GARCH(1,1)
Model Student t Student t Student t Student t GED Student t

Conditional Mean Equation

μ 5.41E-05 -0.004935 *** -0.002215 -0.022685*** -0.009859*** 0.000645

ν 0.041633 0.074751 *** 0.035800 0.298110*** 0.327220*** -0.025582

Φ (AR -0.103037 0.285215 ** -0.833414 *** -0.024371 -0.007769 0.674431***

ρ (MA 0.089589 -0.370558 ** 0.816383 *** -0.041309 0.006581 -0.706483***

Conditional Variance Equation

ω 6.75E-05*** 0.000183 *** 0.000152*** 0.002070*** 0.000569*** 1.15E-05***

β 0.848645 *** 0.708996 *** 0.870443*** 0.550631*** 0.499536*** 0.905820***

⍺ 0.119950 *** 0.287048 *** 0.083697*** 0.106173*** 0.013459*** 0.087723***

γ - - - -0.126382*** - -

( β +α ¿ 0,968595 0,996044 0,95414 0,656804 0,512995 0.993543

Source: Authors’ extract from EViews (2022): ***, **, and * denote significance at the 1%, 5%, and 10%
levels, respectively.

Except for Dogecoin and Crude Oil, all of the selected indices from Bitcoin have a high
volatility persistence, as the sum of the ARCH term (α) and the GARCH term ( β ) is near to
one, suggesting that the impacts of volatility shocks fade away slowly. The sum of the ARCH
and GARCH effects is a measure of volatility persistence; if the sum is near one, the impacts
of shocks fade away slowly. The faster the effects fade away, the lower the values of the
GARCH and ARCH effects (Yavas and Debi, 2016). Bitcoin has a high volatility persistence,
which means that huge returns, particularly large negative returns, are correlated with higher
future volatility persistence (Wang and Yang, 2017). This means that past positive returns on
certain markets might be used to predict future results. Mashamba and Magweva, (2013)
emphasize that the volatility of risk is impacted by previous square residual terms.
Furthermore, the ARCH term's signals suggested that positive volatility shocks had a larger
 influence on volatility than negative shocks of the same size (Dwarika et al, 2021). From
Bitcoin to Natural Gas, the standard deviation coefficient is significant. Except for J201, the
parameter describes the influence of previous shocks, which was significant for all of the
examined indices at all conventional significance levels, i.e., 99% level of significance. This
suggests that historical results have a significant impact on current volatility.

Table 9: Selected model outputs; Cryptocurrencies Vs Stock Market Indices Before Covid-19

Bitcoin Ripple Litecoin Dogecoin S&P 500 Dow Jones

Selected GARCH(1,1) GARCH(1,1) GARCH(1,1) TGARCH(1,1) GARCH (1,1) GARCH (1,1)

Model
Normal Normal Normal Normal Normal GED

Conditional Mean Equation

μ 3.66E-05 -0.006388* -0.002740 -0.025769 -0.000225 -0.000357

ν 0.043633 0.076345 0.039024 0.421020* 0.169747** 0.177377***

ϕ -0.050577 -0.681769*** -0.859069*** 0.005000 0.018546 -0.306727

ρ 0.042861 0.721869*** 0.837042*** 0.005000 -0.080663 0.260928

Conditional Variance Equation

ω 7.02E-05*** 0.000316*** 0.000162*** 0.002860*** 4.59E-06*** 3.32E-06***

β 0.821994*** 0.686565*** 0.869437*** 0.600000*** 0.712845*** 0.748552***

⍺ 0.162347*** 0.264227*** 0.086083*** 0.150000*** 0.244722*** 0.226141***

γ - - - 0.050000 -

( β +α ¿ 0.984311 0.950792 0.95552 0.750000 0.957567 0.974693

Source: Authors’ extract from EViews (2022): ***, **, and * denote significance at the 1%, 5%, and 10%
levels, respectively.

Table 9 shows the selected cryptocurrencies compared against the selected stock market
indices before Covid-19, and the results are shown. The α shows the coefficients for the
variables selected to compare performance, and although a 16.23% presence of variance
shock is visible for bitcoin before Covid-19, Table 10 shows an increase to 2.54%. For a
leverage effect, the sign, magnitude, and statistical significance of gamma are looked at. The
leverage parameter γ is positive at 0.05000 for dogecoin only indicating the presence of the
leverage effect in the variance-generating process.

Constants c and alpha must be greater than 0 for variance equation coefficients to be non-
negative and beta must be greater than 0 (e.g., coefficient of GARCH(-1)) alpha + gamma >
0. Hence, the variance model remains valid even if gamma = 0 if alpha + gamma >= 0. As
noted by Wilhelmsson (2006), the non-negativity condition is not violated because the past
shock GARCH term (0.821994) confirms that the variance is stationary and statistically
significant (at 1%) and their sum is near unity, indicating that volatility persists.

In GARCH(1,1) models, volatility persistence is given by β + α < 1. All variables have a

conditional variance of less than 1. There was a volatility persistence of less than 1 for the
stock market indices before and during the crash. According to Beg and Anwar (2012), stock
prices may experience volatility only for a few hours, but other financial assets may
experience it longer.

Table 10: Selected model outputs; Cryptocurrencies Vs Stock Market Indices During Covid-19
 Bitcoin Ripple Litecoin Dogecoin S&P 500 Dow Jones

Selected GARCH(1,1) GARCH(1,1) GARCH(1,1) GJR GARCH(1,1) GARCH(1,1)

Model
GED GED Student t Student t Student t Student t

Conditional Mean Equation

μ -0.050218 0.001465 -0.000527 -0.009092 1.23E-05 -0.002026**

ν 1.425028 0.010974 0.035785 0.075206 0.127694 0.371581***

ϕ -0.079781 -0.011698 0.310711 0.007423*** -0.477628* -0.517915**

ρ -0.004853 -0.108741 -0.398440 -0.177665*** 0.422250 0.449642*

Conditional Variance Equation

ω 0.000546** 6.16E-05** 6.92E-05 0.004345*** 3.38E-06** 4.11E-06**

β 0.566058*** 0.876847*** 0.898815*** 0.547771*** 0.837406*** 0.765426***

⍺ 0.025357 0.112287*** 0.088324*** 0.098396** 0.149075*** 0.205863***

γ - - - -0.143874** - -

( β +α ¿ 0.585937 0.989134 0.987139 0.646167 0.986481 0.971289

Source: Authors’ extract from EViews (2022): ***, **, and * denote significance at the 1%, 5%, and 10%
levels, respectively.

In their 2017 investigation of spot prices, Ojo and Olanrewaju used a GARCH volatility
model (GED-GARCH) to account for the impacts of leverage. In Table 10, the chosen
cryptocurrencies are compared to the chosen stock market indexes for COVID-19. All
cryptocurrencies have negative serial correlations ( ρ ), while positive for stock market
indexes. The serial correlation is only significant for Dow Jones and Dogecoin currency,
which suggests that the historical returns could predict future returns and the insignificant
stocks show that historical returns are least effective in predicting the future (Fama, 1970).
Past shocks on the return (φ ¿ are positive and significant for stock market indices and
Dogecoin, suggesting that past positive shocks can be used to predict future returns on those
indices.
Variance Equation

Positive risk premiums are present in all of the indices and cryptocurrencies we chose. Since
it is now the most popular cryptocurrency, Ripple has the lowest risk premium, while Bitcoin
has the greatest risk premium. At a 1% level of significant, only the Dow Jones index is
meaningful. This indicates that the conditional variance's assessment of risk rose as the daily
mean return did. This implies that taking the risk will result in a favorable reward. The
asymmetry term, with a value of 0.000546, is significant (at 1%) and has the right sign
(positive). This supports the leverage effect since it shows that volatility increases more after
a significant negative shock return than it does after a significant positive shock (or a
negative shock has a bigger influence on volatility than a positive shock of the same size).

All of the indices and cryptocurrencies had favorable effects, but only Bitcoin was
statistically significant at 1%; the rest are at 10%. Only for Dogecoin: During Covid-19, the
coefficient (-1.43874) on the asymmetric term is negative and significant (at 5%).
demonstrating a sizable asymmetry (negative shocks raise conditional volatility in the
following period more than positive shocks). This does support the presence of a leverage
effect since a negative error term will result in a positive influence on variance when
multiplied by a negative coefficient.

Since β +α =0.585937 , it suggests that there is positive conditional variance (volatility effect)
present in the return series. The effect of an error term that follows GED on σ 2t (conditional
variance equation) is β + ω = 0.566058 + 0.000546 = 0.566604. The coefficient of 0.025357 (α),
means that 2.54% of the present variance shock (either positively or negatively) was realized
in the succeeding period. Therefore, the leverage effects of the series are close, except for the
large gap leverage impact that was seen during Covid-19, and volatility clustering is detected.
Since Bitcoin is insignificant at all conventional significance levels, the arch term (α ) is
positive and significant for equities and other cryptocurrencies, which suggests that past
positive returns could be used to predict future performance on these markets. Alarm (2013)
emphasizes that past square residual terms have an impact on the risk's volatility.
Additionally, the signals of the Arch term suggested that compared to negative events of
equal magnitude, positive volatility shocks have a bigger impact on volatility (Dwarika,
2021).

The Garch term statistic ( β ¿, which accounts for the impact of previous shocks, was
substantial for each of the examined indices at all levels of conventional significance, or 99%
level of significance. This shows that historical returns have a stronger impact on volatility
today. Since the sum of the Arch (α ¿term and the Garch term ( β ¿for both cryptocurrencies is
close to one, it is clear that Ripple and Litecoin have high volatility persistence, and Bitcoin
and Dogecoin have low volatility persistence. The stock market returns exhibit persistently
high levels of volatility. This implies that shocks to the conditional variance will remain
significant for a very long time (Oberholzer, 2015). Large returns are correlated with higher
future volatility persistence due to high volatility persistence (Wang, 2017).

5. CONCLUSION AND RECOMMENDATION

While cryptocurrencies are frequently part of the discussion regarding potential safe haven
investments, empirical research on their relevance before the Corona pandemic… The
characteristics of four cryptocurrencies—Bitcoin, Ripple, Litecoin, and Dogecoin—as well as the
performance of the S&P 500 and Dow Jones during the initial bear market phase related to the
COVID-19 issue, are examined in this study. To shed new light on the haven qualities of
cryptocurrencies for investors, we also assess the possibility of cryptocurrencies replacing fiat
currencies for six years.

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