Bitcoin vs. fiat currencies: Insights from extreme dependence and risk spillover analysis with financial markets

We compare Bitcoin to fiat currencies (EUR, GBP, and JPY) using extreme dependence and temporal dynamic risk spillover analysis with various financial markets covering fixed-income, stock, and commodity indices. Using daily data from October 2010 to December 2022, covering various stress periods including the COVID-19 outbreak and the war in Ukraine, the results are summarized as follows. First, there is a similarity during the bearish market between Bitcoin and fiat currency markets regarding their relationships with fixed-income and gold markets in terms of temporal dynamic upside and downside risk spillover impacts despite the dissimilarity in their tail dependence structures. Thus, Bitcoin and fiat currency markets emerge as very feasible investments due to their insensitivity to the downside risk associated with fixed-income and gold markets. Second, there is a clear difference between Bitcoin and fiat currencies in their relationship with stock and crude oil markets based on the temporal dynamic upside and downside risk spillovers. Investors in stock and crude oil markets should consider fiat currencies for diversification purposes whereas these investors should take a short position on Bitcoin to protect their portfolio against downside extreme events such as the COVID-19 outbreak and Russia–Ukraine conflict. Our findings have implications for investors in terms of how they can protect their portfolios against extreme downward price movements.