An Empirical Investigation of Bitcoin Hedging Capabilities against Inflation using VECM: The Case of United States, Eurozone, Philippines, Ukraine, Canada, India, and Nigeria

Abstract

This study examines Bitcoin's potential as an inflation hedge in different countries, including the United States, the Eurozone, the Philippines, Ukraine, Canada, India, and Nigeria. The study reveals varying results across countries using the Vector Error Correlation Model (VECM) with secondary monthly data from January 2012 to June 2023 for Bitcoin prices and inflation rates. Bitcoin exhibits an insignificant short-term relationship in the United States but a significant long-term negative correlation, suggesting it may not be a reliable inflation hedge. Similarly, no significant relationship was found in the Eurozone, the Philippines, Ukraine and Nigeria, indicating Bitcoin's limited effectiveness as an inflation hedge. Contrastingly, the study identifies a significant positive relationship between Bitcoin and inflation in Canada and India, indicating potential hedging against inflation within these economies. Therefore, investors, portfolio managers, and policymakers should consider these country-specific findings when evaluating Bitcoin's role as an inflation hedge. Furthermore, this study contributes valuable insights into cryptocurrencies and their potential in financial risk management.