key: cord-341684-buj8u63b
authors: Corbet, Shaen; (Greg) Hou, Yang; Hu, Yang; Larkin, Charles; Oxley, Les
title: Any port in a storm: Cryptocurrency safe-havens during the COVID-19 pandemic
date: 2020-07-07
journal: Econ Lett
DOI: 10.1016/j.econlet.2020.109377
sha: 
doc_id: 341684
cord_uid: buj8u63b

Controlling for the polarity and subjectivity of social media data based on the development of the COVID-19 outbreak, we analyse the relationships between the largest cryptocurrencies and such time-varying realisation as to the scale of the economic shock centralised within the rapidly-escalating pandemic. We find evidence of significant growth in both returns and volumes traded, indicating that large cryptocurrencies acted as a store of value during this period of exceptional financial market stress. Further, cryptocurrency returns are found to be significantly influenced by negative sentiment relating to COVID-19. While not only providing diversification benefits for investors, results suggest that these digital assets acted as a safe-haven similar to that of precious metals during historic crises.

The onset of the COVID-19 pandemic has resulted in many variants of international response across social, epidemiological and economic frontiers. The same variation was similarly observed in the response of both financial markets and investors when attempting to evaluate the scale of the issue to which they were confronted. Chinese financial markets acted as the initial epicentre of the shock ), however, international contagion effects quickly escalated. In the midst of this confusion, traditional flight-to-safety channels within energy markets dissipated with the escalation of geopolitical tensions largely instigated by the US, Russia and Saudi Arabia, with investors struggling to identify credible safe-havens (Goodell [2020] , ). Within this environment, we test the hypotheses as to whether cryptocurrencies acted in this capacity.

One mechanism through which we can proceed is through the use of sentiment data obtained through social media, based on a lexicon of terms developed to quantify the polarity and subjectivity of time-stamped data. Such techniques allow for analysis not only of sentiment based on the severity of the COVID-19 pandemic, but also as to interlinkages between such sentiment and cryptocurrencies as a safe-haven asset in such time of extreme financial market panic. Such research builds on the growing literature that has identified a sharp elevation of cross-asset correlations during the early stages of the pandemic, prior to WHO identification ).

Cryptocurrencies as a hedging mechanism during periods of financial market chaos, while further validating the product's place as a credible financial market asset, would cause particular concern for regulators and policy-makers due to the wide-ranging issues present with regards to illicit usage (Foley et al. [2019] ), manipulation and instability (Gandal et al. [2018] ). Despite these concerns, China has continued to educate and support the use of cryptocurrencies through official channels, providing government-produced literature on cryptocurrencies, which has been used to educate the population of China about the nature and future of digital currencies ).

Such government reassurance could act as both a catalyst and supporting structure to perceived investment safety during market panic.

We collect data for cryptocurrencies from the Binance exchange, which is the most liquid international exchange throughout 2019 and 2020. Data on the other included assets are collected from Bloomberg. We focus on larger cryptocurrency assets, those with a market value over $500 million 1 as of end January 2020. In Figure 1 and 2, we observe the volatility these assets' prices and volumes traded for the period 1 January 2019 through 31 March 2020 respectively, as separated by the average return and volumes of Bitcoin, altcoins, exchange tokens and privacy coins, with extensive summary statistics between the periods analysed provided in Table 1 . As per Corbet et al. [2018] , we define returns as the daily log changes and volatility as the five-day standard deviation. In particular, during the onset of the COVID-19 pandemic in the aftermath of the official WHO pandemic declaration on 5 January 2020 and the first case of international transmission on 13 January 2020, there is a pronounced and sustained increase in cryptocurrency volumes traded across each category.

The next stage of data collection surrounded the identification of investor sentiment. To complete this task, Twitter data was collected for a period between 1 January 2019 and 31 March 2020 for each of the identified companies. All tweets mentioning the terms ' , and at the same time the terms 'Cryptocurrency' or 'Crypto' or 'Bitcoin' or 'Blockchain' with inclusive search using the terms 'Financial' or 'Markets' were computationally collected through the search Twitter function on https://twitter.com/explore using the Python 'twitterscraper' package, observing platform rate limiting policies. A total number of 397,558 unique tweets were collected 2 . The data was then aggregated by company and by day as 

To specifically analyse the effects of COVID-19 sentiment on cryptocurrency returns, we employ a standard GARCH (1,1) methodology of Bollerslev [1986] of the following form:

(3)

R t−j represents the lagged value of the selected cryptocurrency returns, j number of periods before R t is observed. b 2 V t represents the natural logarithm of cryptocurrency volumes traded, while b 3 U SD t represents the value of the GBP/USD on the same day on which the cryptocurrency returns were generated. Finally b 4 λ t measures the influence of both the polarity and subjectivity of COVID-19 sentiment respectively. We repeat the analysis for both the Harvard General Inquirer IV-4 and Loughran and McDonald Financial Sentiment dictionaries. Bollerslev [1986] argued for restrictions on the parameters for positivity, ω > 0, α ≥ 0 and β ≥ 0, and the wide-sense stationarity condition, α + β < 1. While the GARCH (1,1) process is uniquely stationary if E[log(β + αǫ 2 t )] < 0, Bollerslev [1986] also proved that if the fourth order moment exists, then the model can handle leptokurtosis. Bonferroni adjusted results are presented in this analysis. To cater the multiple hypothesis problem, we adjust the significance level using the Bonferroni correction, which leads to a significance level of 0.1%. The generalised Bonferroni method adjusts the significance level such that hypothesis H 0,(i) , i = 1, . . . , s, is deemed rejected if and only if:

This procedure has the advantage of being robust to the dependence structure of the hypothesis tests. The selection of this methodological structure enables robust analysis with regards the influence of negative sentiment relating to the outbreak of COVID-19 on cryptocurrency prices, where significant positive interactions would reflect direct pricing effects as controlled for volumes traded as reflected, and international effects as controlled for through the addition of the GBP/USD exchange rate. The results of the GARCH(1,1) analysis are presented in Tables 2 and 3 

When considering the role of negative sentiment relating to the outbreak and development of the COVID-19 pandemic, our results suggest that there developed significant and pronounced timevarying price-volatility effects as investors identified both the severity and nature of the pandemic's growth trajectory and potential economic repercussions. Such results are supported by the continued Chinese-guidance and support of cryptocurrencies as a viable and stable asset class. Such government reassurance could act as both a catalyst and supporting structure to perceived investment safety during a market panic. The use of cryptocurrencies as a safe-haven during episodes of severe market volatility will cause alarm within regulatory and policy-making authorities. The widespread lack of continuity, regulation and international legislation, along with the substantially pronounced risks associated with relatively unsophisticated fraud pose serious challenges for policymakers to resolve. 5 J o u r n a l P r e -p r o o f

Generalized autoregressive conditional heteroskedasticity

Aye Corona! The contagion effects of being named Corona during the COVID-19 pandemic

The influence of the COVID-19 pandemic on asset-price discovery: Testing the case of Chinese informational asymmetry

Pandemic-related financial market volatility spillovers: Evidence from the Chinese COVID-19 epicentre

The contagion effects of the COVID-19 pandemic: Evidence from Gold and Cryptocurrencies

Exploring the dynamic relationships between cryptocurrencies and other financial assets

Sex, drugs, and bitcoin: How much illegal activity is financed through cryptocurrencies?

Price manipulation in the bitcoin ecosystem

COVID-19 and finance: Agendas for future research