Are islamic gold-backed cryptocurrencies different?

We reveal that gold-backed Islamic cryptocurrencies behave differently from their conventional counterparts. Sharia-compliant cryptocurrencies are positively correlated with the yellow metal, while conventional ones are weakly and negatively associated with gold. Only PAX Gold is considered the gold-backed cryptocurrency in this study due to the availability of its conventional counterpart. Large-scale cryptocurrencies have not yet been officially banned in Saudi Arabia and the United Arab Emirates, but these governments have issued warnings about the purchase of bitcoins by their citizens.

With stock markets in crisis, investors are more concerned with avoiding losses than focusing on potential gains (Hwang and Satchell, 20), therefore seeking safe haven assets such as gold and cryptocurrencies to avoid further losses. Prior to the COVID-19 crisis, several studies had investigated the safe haven ownership of both gold and cryptocurrencies. The COVID-19 outbreak increases the dynamic connectivity of gold- and gold-backed cryptocurrencies, indicating a contagion effect. But because cryptocurrencies and associated technologies are products of financial engineering and objects of speculation, coins don't fit religion particularly well.

To the author's knowledge, this is the first document that creates bivariate portfolios composed of cryptocurrencies backed by gold and its underlying assets using DCC-t-Copula. The results show that average returns and volatility are higher during the COVID market period and bearish for both PAX Gold and Gold, but the effect is negligible, implying that gold-backed cryptocurrencies can act as safe haven investments during periods of crisis. Gold-backed cryptocurrencies have been gaining interest, especially during the current COVID-19 crisis, as they are digital assets whose value is 100% pegged to the value of gold, so they combine the characteristics of gold and stablecoins. Growing global interest in cryptocurrencies naturally extends to the Gulf and Southeast Asia, the main centers of Islamic finance.

In addition, unlike previous studies conducted on cryptocurrencies that focused on major cryptocurrencies, such as Bitcoin, this study considers the cryptocurrency Paxos Standard to be the counterpart of Pax Gold. This study only considers Pax Gold to represent gold-backed cryptocurrencies due to the availability of their data and conventional counterparts. Therefore, future studies may specifically focus on the different cryptocurrencies backed by Gold to confirm the generalization of safe haven ownership of these cryptocurrencies. According to bivariate portfolios based on net side-effects, investors of gold-backed cryptocurrencies should not add gold to their portfolio during the pandemic because it is a net recipient of cryptocurrency risk.

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Garland Pietrzak
Garland Pietrzak

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