Cryptocurrency entering uncharted territory : a combined deductive and inductive study into the mechanisms of institutional demand for cryptocurrencies and an examination of Bitcoin’s safe haven capabilities

2020

The objectives of this master’s thesis are to uncover the drivers behind the recent increasing

institutional demand for cryptocurrencies, and to examine whether Bitcoin is showing signs

of establishing itself as a safe haven asset. To answer the research questions posed, a mixed

methods research design was employed. The first research question led us to base our data

collection on interviews with experts and actors within the industry. The second research

question prompted quantitative analyses of the price performance of Bitcoin relative to the

performance of indices indicative of the global equity market and the principal flight-to-safety

asset, represented by the S&P 500, the MSCI World Index, and gold respectively. The

performance of the assets and indices were analysed over a seven-year period, and individual

sub-periods exhibiting signs of financial instability were determined using the VIX as an

indicator of market unrest. Pearson correlation analyses were then conducted to measure the

strength of the correlations, or lack thereof, between the returns of the assets and indices for

the defined sub-periods.

Our findings suggest that the drivers behind the increasing institutional demand for

cryptocurrencies are multifaceted and complex, and that they include factors both external and

internal to the cryptocurrency industry. Moreover, our findings indicate that the returns of

Bitcoin were uncorrelated with the returns of both indices and gold during the entire period

examined. During the periods of market unrest, Bitcoin was uncorrelated with the indices in

three individual periods. However, during the two most recent periods, 2020 as a whole and

during the initial months of the COVID-19 pandemic, Bitcoin had a moderate to strong

positive correlation with both indices.

On the basis of our findings, we conclude that the recent increasing institutional demand for

cryptocurrencies can be attributed to expansionary monetary and fiscal policy, an increased

focus on regulations, access to new markets through DeFi, and reduced volatility. We also

conclude that Bitcoin is not currently establishing itself as a safe haven asset.

Keywords: Bitcoin, cryptocurrencies, S&P 500, safe haven, macroeconomic policy