Asymmetric dynamic correlations and portfolio management between Bitcoin and stablecoins

This study unveils the unique properties of crypto assets and investigates the dynamic connectedness between six prominent stablecoins and Bitcoin in comparison with Bitcoin/stablecoin pairs involving portfolio management. Empirically, using the DCC-GJR-GARCH and partial wavelet coherence approaches, we show that Bitcoin provides greater diversification potential benefits compared to stablecoins during the COVID-19 crisis. The evidence suggests that Bitcoin, as the dominant cryptoasset, can serve as a suitable asset for portfolio diversification against stablecoins. Besides, we evaluate potential hedging benefits of cryptocurrencies for market participants and find that stablecoins are poor hedging products in most of the cases considered. The optimal portfolio for the hedging strategy involving a mix of Bitcoin and stablecoins reveals that the weights assigned to stablecoins are lower than those for Bitcoin. In particular, our results provide timely implications for market participants whose crypto portfolios include stablecoins, especially after Terra's collapse.