When you need them, they are not there : hedge capacities of cryptocurrencies disappear in downtrend markets

We provide empirical evidence supporting the economic reasoning behind the impossibility of diversifcation benefts and the hedge attributes of cryptocurrencies remaining in force during the downside trends observed in bearish fnancial markets. We employ a spillover connectedness model driven by time-varying parameter vector autoregressions on daily data covering January 2018 to November 2022 to analyze spillover transmissions between conventional and digital markets, focusing on the role of stablecoin issuances. We study the stock, bond, cryptocurrency, and stablecoin markets and fnd very high connectedness, which varies over time in response to up/down trends in fnancial markets. The results show that during fnancial turmoil, cryptocurrencies amplify downside risks rather than serve as diversifers. In addition to risky assets from conventional fnancial markets, cryptocurrencies champion the transmission of spillovers to digital and conventional markets. In contrast, changes in stablecoin issuances produce few shocks because of their pegged prices, but they facilitate investors' switch from volatile cryptos to more stable digital instruments; that is, we observe a phenomenon designated by us as the "fight-to-cryptosafety." We draw insightful conclusions, provoking new thinking regarding portfolio hedge strategies that could potentially beneft investors when searching for less volatile investment performance.