Essays on Cryptocurrencies in Times of Crisis

Abstract

The cryptocurrency market has undergone unprecedented growth and transformation, driven by technological advancements, global crises, and shifts in financial paradigms. This thesis comprises three empirical studies that collectively enhance our understanding of diverse cryptocurrency types, namely Shariah-compliant cryptocurrencies, green cryptocurrencies, stablecoins (fiat-backed, gold-backed, crypto-backed), and traditional cryptocurrencies, during major global shocks (the COVID-19 pandemic, the Russia-Ukraine war, and the FTX exchange collapse), with a focus on their resilience, safe-haven properties, market connectedness, portfolio performance and stability. The first empirical chapter investigates the resilience and safe-haven characteristics of Shariah-compliant cryptocurrencies relative to conventional ones. Using wavelet coherence and DCC-GARCH, quantile, and threshold regressions as robustness, it reveals that Shariah-compliant cryptocurrencies offer superior short- and medium-term safe-haven properties, particularly during geopolitical turmoil. Portfolio optimisation demonstrates that these assets deliver higher risk-adjusted returns during shocks, underscoring their potential in crisis-resilient portfolio construction. The second empirical chapter analyses the dynamic connectedness of green and non-green cryptocurrencies with traditional and environmental assets during the COVID-19 pandemic and the Russia-Ukraine war. Using a TVP-VAR framework and three portfolio strategies, namely minimum variance, correlation, and connectedness, the study shows that green cryptocurrencies, despite heightened volatility during crises, enhance hedging effectiveness when combined with strategic assets such as carbon futures, gold, and energy commodities. The third empirical chapter evaluates the impact of the FTX collapse on the return and volatility of stablecoins and traditional cryptocurrencies using Difference-in-Differences and event study methods. The findings reveal that while stablecoins were more resilient than traditional cryptocurrencies, they were not immune to systemic shocks. Notably, gold- and crypto-backed stablecoins did not outperform fiat-backed ones during crises, underscoring the importance of liquidity and transparency over collateral type. Overall, this thesis provides novel empirical insights into the evolving cryptocurrency landscape, offering actionable implications for investors, regulators, and policymakers navigating digital assets in times of systemic stress.