Hedging Cryptos with Bitcoin Futures

The introduction of derivatives on Bitcoin enables investors to hedge risk exposures in cryptocurrencies. Because of volatility swings and jumps in cryptocurrency prices, the traditional variance-based approach to obtaining hedge ratios is infeasible. As a consequence, we consider two extensions of the traditional approach: first, different dependence structures are modeled by different copulae, such as the Gaussian, Student-t, Normal Inverse Gaussian and Archimedean copulae; second, different risk measures, such as value-at-risk, expected shortfall, and spectral risk measures are employed to find the optimal hedge ratio. Extensive out-of-sample tests give insights into the practice of hedging various cryptos and crypto indices, including Bitcoin, Ethereum, Cardano, the CRIX index, and a number of crypto-portfolios in the time period Decem- ber 2017 until May 2021. Evidence shows that BTC futures can effectively hedge BTC and BTC-involved indices. This promising result is consistent across different risk measures and copulae except for Frank. On the other hand, we observe complex and diverse dependence structures between BTC-not-involved assets and the futures. As a consequence, the results of hedging other assets and indices are diverse and, on some occasions, not ideal