Cryptocurrencies Price Forecast and Hedging Capabilities

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The British University in Dubai (BUiD)
Cryptocurrency is a new kind of investment recently emerged after being developed using blockchain technology, cryptocurrency price prediction is difficult due to its high volatility as this attracted many investors who are looking for high rewards, crypto described to be lucrative investment which in the past five years attracted considerable amount of investment capital, currently crypto market cap exceeds a trillion USD, on the other hand crypto high volatility could vanish the entire investment. This research aims to provide investors with methods to forecast cryptocurrencies price in the aim of supporting their decision making, as well as to investigate cryptocurrency short and long term relationship with stock markets indexes (S&P500 and FTSE100) and hard commodities (Gold and Oil) in the aim also to reveal more details about cryptocurrencies price behavior, at the same time investigating cryptocurrency relationship with Gold can give us crypto capability in providing hedge against recession as Gold always considered to be ‘safe haven’ against market high volatility, the data span collected covering a period from Jan-2018 till Sep-2022 for all variables tested in this study including Bitcoin, Litecoin, S&P500, FTSE100, Gold and Oil, in this study we used Granger causality and Engle Granger tests to detect existence of short and long term relationship between our variable, at the same time we used ARIMA,VAR, and VECM models to forecast 15 days cryptocurrency closing price. Our findings shows that ARIMA model (7,1,7) and ARIMA (8,1,10) demonstrated evidence to be very good model in forecasting 15 days for Bitcoin and Litecoin closing price respectively, as both models show errors forecast less than 5%. also, empirical finding shows that there is no statistically relationship between stock markets performance nor with Gold and Oil price in both long and short run with cryptocurrencies. Furthermore, in the aim to investigate the capability of cryptocurrencies to provide hedging ‘Safe haven’ to its investors the same as Gold, the empirical findings in this research shows that the behavior of cryptocurrencies price statistically found different than Gold in both short and long run, hence as a result of this cryptocurrencies cannot be assumed to be a ‘safe haven’ nor its capable to provide hedging such as Gold during recession time. This study contributes to literatures to reveal more details about cryptocurrency price forecast and determinants, also to support investors decisions throw providing them with the tools required to predict cryptocurrency price, finally this study highlighting the risk coming from cryptocurrency volatility on the whole economy especially the empirical results show no relationship existing with stock markets nor with commodities chosen in this study.
cryptocurrency, bitcoin, litecoin, crypto hedging, granger causality, engle granger cointegration, blockchain technology