Proxy-Hedging of Bitcoin Exposures With Altcoins

The aim of this research is to explore the associated risks with hedging in cryptocurrencies markets. It focuses on finding the most effective proxy hedge instrument for the Bitcoin-USD market. Due to its particularities, this market does not exhibit the same features as traditional financial markets do. In appearance, it seems very related to other altcoins (alternative coins), but in reality, it exhibits unusual volatility clustering effects. This behaviour has a direct impact on the hedging strategies of business exposed to crypto-currencies, including the hedge funds, mining farms or ICO projects. The paper explores the econometric features of Bitcoin and other Altcoins and underlines the need for fat tail distributions and volatility clustering models. Also, it examines the density forecasting capacity of various proxy hedge instruments including Bitcoin, Bitcoin Cash and Ether exchange rates