**3. Literature Review**

Although Bitcoins have been of interest in law and computer science for a long time, it has not significantly attracted the focus of economic and financial researchers. First of all, we mention the study of Nakamoto (2008), as the elusive creator of bitcoin. Following its proposal, Bitcoin was originally presented as a purely peer-to-peer version of electronic cash that allows online payments directly from one party to another without going through any monitoring institution. After that, the sharp spike in bitcoin price, and its huge volatility from time to time, has steered debate amongs<sup>t</sup> economists.

Some papers have concentrated on the characteristics of cryptocurrencies following different forms of money and other well-known assets; among others Grinberg (2011), Wu and Pandey (2014), Barber et al. (2012), Whelan (2013) and Glaser et al. (2014). For example, Grinberg (2011) shows that bitcoin has a competitive advantage to make micropayments. However, Wu and Pandey (2014) finds that bitcoin does not have the key attributes of a currency and it should be regarded as a very illiquid financial asset. Whelan (2013) argues that bitcoin might look like the dollar. The main difference is that the dollar is backed by a governmen<sup>t</sup> entity, while bitcoin is created and managed by non-governmen<sup>t</sup> entities. Moreover, users' intentions to participate in the Bitcoin ecosystems are described by Glaser et al. (2014), finding that new users tend to trade Bitcoin on a speculative investment intention basis rather than as a means of paying for goods or services. Likewise, Yermack (2015) claims that Bitcoins closely resemble speculative investments, and their trading style demonstrates characteristics similar to stock trading.

Other papers have concentrated on the price formation of cryptocurrencies; among others Buchholz et al. (2012), Kristoufek (2013), van Wijk (2013), Dyhrberg (2015a). As for the case of any other assets, these authors argued that the price of Bitcoin is determined by several factors such as demand–supply fundamentals, investor's speculative behavior and global financial indicators related to equity markets, foreign exchange rate or crude oil and gold. Ali et al. (2014) also include other factors that influence the value of virtual currencies, such as risk-return trade-offs, transaction costs or relative benefits, and habit formation.

Briere et al. (2013) provide a tentative first look at how Bitcoin might be a suitable instrument for diversification. The researchers concluded that Bitcoin delivers high diversification benefits as it correlates negatively with most of the analyzed stock market indices. More recently, Gangwal (2016) wrote about the effect of including Bitcoin to the portfolio of an international investor. Using mean-variance analysis, the author argued that adding Bitcoin to portfolios always yields a diversification benefit (i.e., a higher Sharpe ratio). This means that Bitcoin return offsets its volatility risk. Due to the non-normal nature of Bitcoin return, Eisel et al. (2015) do not propose the classic mean-variance approach applied by Briere et al. (2013), but adopt a Conditional Value-at-Risk framework (CVaR). The results indicate that an investment in Bitcoin increases the CVaR of a portfolio. Nonetheless, this additional risk is overcompensated by high return, leading to better risk-return ratios. This last issue is further extended by Dyhrberg (2015b) who explores the financial asset capabilities of bitcoin using the Generalized Auroregressive Conditional Heteroskedasticity (GARCH) model. Results show that Bitcoins have a few aspects that are similar to gold and the dollar, indicating hedging capabilities and advantages as a medium of exchange. The asymmetric GARCH show that bitcoin may be useful in risk managemen<sup>t</sup> and ideal for risk-averse investors in anticipation of negative shocks to the market. Overall, one can conclude that Bitcoin has a place in the

<sup>11</sup> Please see the article "Bitcoin Regulation in china still unclear, but Chinese exchanges thrive overseas" by Leonhard Weese. Published on forbes.com.

financial markets and in portfolio management, as it can be considered as something between a fiat currency and a commodity. Conversely, Baur et al. (2018), using the same sample and econometric models of Dyhrberg (2015b), showed that Bitcoin exhibits distinctively different return, volatility and correlation characteristics compared to gold and the US dollar. On the other hand, Baur et al. (2015) argue that Bitcoin is a hybrid between precious metals and conventional currencies. They also highlight its role as a useful diversifier (i.e., uncorrelated with traditional assets) and an investment asset. In another interesting study, Bouri et al. (2017b) investigate the relationship between Bitcoin and commodities by assessing the ability of Bitcoin to act as a diversifier, hedge, or safe haven against daily movements in commodities in general, and energy commodities in particular. Through the use of an Asymmetric Dynamic Conditional Correlation (DCC) model, results show that Bitcoin is a strong hedge and a safe-haven against movements of commodity indices, including energy commodities. Furthermore, when taking in account the December 2013 Bitcoin price crash, results reveal that Bitcoin hedge and safe-haven properties against movements of commodity indices are only present in the pre-crash period, whereas in the post-crash period, Bitcoin is no more than a diversifier. However, Bouoiyour and Selmi (2015) using global macroeconomic and financial indicators and technical drivers, provide insightful evidence that Bitcoin may be used for economic reasons. Furthermore, there is not any sign of being a safe haven or a long-term promise. Our study differs from the previously mentioned studies. In fact, the global financial crisis of 2007–2009 (the "Great Recession") has simulated considerable interest in defining, measuring and monitoring connectedness among asset classes, markets and countries. As illustrated by this crisis, an important aspect of systemic risk is the propagation of adverse shocks throughout the whole system. As a consequence, a strand of literature that aims at evaluating systemic risk importance and interconnectedness has emerged. In the respective literature, there are many studies done by, among others, Kaul and Sapp (2006), Meurers and Diekmann (2007), Baur and McDermott (2010), Baur and Lucey (2010), Beckmann et al. (2015), Bouoiyour and Selmi (2017), Ranaldo and Söderlind (2010), Grisse and Nitschka (2013), Botman et al. (2013), and Morley (2014), that account for spillover effects and interconnectedness, but only among traditional assets classes. According to this strand of research, our paper builds on and contributes to extending the literature on Bitcoins by assessing interconnectedness within the cryptocurrency market and between Bitcoin price changes and the volatility of traditional asset classes, using within the group of measures in the literature on the spillover index approach.
