Ether: Bitcoins competitor or ally?

Ether: Bitcoin’s competitor or ally? Jamal Bouoiyour 1 and Refk Selmi2

Abstract: Although Bitcoin has long been dominant in the crypto scene, it is certainly not alone. Ether is another cryptocurrency related project that has attracted an intensive attention because of its additional features. This study seeks to test whether these cryptocurrencies differ in terms of their volatile and speculative behaviors, hedge, safe haven and risk diversification properties. Using different econometric techniques, we show that a) Bitcoin and Ether are volatile and relatively more responsive to bad news, but the volatility of Ether is more persistent than that of Bitcoin; b) for both cryptocurrencies, the exuberance and the collapse of bubbles were identified, but Bitcoin appears more speculative than Ether; c) there is negative and significant correlation between Bitcoin/Ether and other assets (S&P500 stocks, US bonds, oil), which would indicate that digital currencies can hedge against the price movements of these assets; d) there is negative tail independence between Bitcoin/Ether and other financial assets, implying that these cryptocurrencies exhibit the function of a weak safe haven; and e) The inclusion of Bitcoin/ Ether in a portfolio improve its efficiency in terms of higher reward-to-risk ratios. But investors who hold diversified portfolios made of stocks or bonds and Ether may face losses over bearish regime. In such situation, stock and bond investors may take a short position on Bitcoin Keywords: Bitcoin, Ether; volatility; speculation; hedge; safe haven; risk diversification. JEL Codes: F39 ; F65 ; G15 ; G19 ; G2.

1 CATT, University of Pau, Avenue du Doyen Poplawski, 64016 Pau Cedex, France. E-mail : jamal.bouoiyour@univ-pau.fr 2 University of Tunis, Campus Universitaire, Avenue 7 Novembre, 2092, Tunis, Tunisia; University of Pau, France. Email: s.refk@yahoo.fr

2

1. Introduction Forty eight years ago the first data packets were sent across the network that became what we know as the internet. At this date, everyone was talking about the power of internet, and its potential impacts on our lives, but no one imagine that our lives will change fundamentally. Nowadays, some expect that the Blockchain has the power to reinvent key institutions. Ten years from now we will wonder how institutions and businesses could have been survived without the internet of value.
   The blockchain rose in the onset of the global financial collapse, when an anonymous programmer under the pseudonym Satoshi Nakamoto released a new protocol for “A Peer-to- Peer Electronic Cash System” using a cryptocurrency, namely Bitcoin. In the wake of the global financial crisis, policymakers faced substantial challenges as the financial markets were in turmoil, credits flows were disrupted and the economies moved into deep recession. In response, some central banks – in particular, the U.S. Federal Reserve Bank (Fed), the Bank of England (BoE), and the European Central Bank (ECB) – have embarked on ever- more expansionary monetary policies while trying to avoid falling into deflation. Central banks planners asserted banks needed bailouts to mitigate the risk of deflationary spirals. When all “normal” tools of monetary policy were used and seemed unsuccessful to drive down long-term interest rates and spur their economies, the pressure to use more “aggressive” monetary instruments raises; hence the usefulness of something known as “quantitative easing” (QE). This instrument aims at putting downward pressure on real long-run interest rates, bolstering prices for corporate equities, enhancing aggregate demand, mitigating disinflationary pressures, and stimulating overall financial conditions (Engen et al. 2015). It must be stressed that central banks ordinarily pursue monetary policy by buying and selling short-term debt securities to target short-term nominal interest rates. These purchases and sales of assets significantly affect the monetary base. In other words, there a two ways thereby a central bank can expand the monetary base by buying bonds from the public, or by lending money to the public. By increasing the monetary base, central banks can affect a variety of asset prices, including exchange rates and stock prices. Making more money available is assumed to encourage financial institutions to lend more to businesses, pushing down the interest rates. Favorable financial conditions would, in turn, help to improve aggregate demand and avoid disinflationary pressures by reinforcing support for consumer spending and enhancing investment environment. But the money creation has not yet found out its way back to the ordinary citizens, and the stimulus packages that were anticipated to ease better 3

liquidity into global markets do not occur systematically. Overall, both conventional
(i.e., man

…(Full text truncated)…