Bitcoin and Its Offspring: A Volatility Risk Approach

Abstract

This study examines the relationship between the return on Bitcoin and the returns on its forks (Litecoin, Bitcoin Cash, Bitcoin Gold, Bitcoin Diamond, and Bitcoin Private). I obtain volatility series and time-varying correlation coefficients (Bitcoin with each of its forks) based on both univariate and multivariate GARCH models (EWMA, DCC, and BEKK). In terms of volatility, the gains of using a multivariate volatility approach are not substantial. However, the three multivariate volatility models offer a better estimation of the time-varying correlation. This study provides evidence that the volatility of Bitcoin forks and the volatility of Bitcoin are dynamically related, and there is a transmission of volatility risk from Bitcoin forks to Bitcoin. The results suggest that Bitcoin and its forks behave as crypto-currencies during bad times and as assets during good times. Also, for most of the sample period, Bitcoin forks do not offer a hedge against Bitcoin risk.