Interdependencies and risk management strategies between green cryptocurrencies and traditional energy sources

Abstract

This study delves into the intricate relationship between environmentally friendly cryptocurrencies, often termed ‘green cryptocurrencies,’ and traditional energy sources, commonly referred to as ‘dirty fuels’, by employing Copula-CoVaR methodology, along with evaluating hedge ratios and the effectiveness of hedging strategies. This research aims to uncover the dynamics of risk and return spillovers between these two distinct asset classes. Our findings reveal significant spillovers of extreme returns, indicating a complex interplay between green cryptocurrencies and dirty fuels. Contrary to the popular decoupling hypothesis, which suggests that green assets operate independently of traditional investment assets, our results demonstrate a notable linkage. The hedging benefits of using these assets reciprocally are found to be minimal, challenging the notion of their effectiveness as standalone diversification tools in an investment portfolio. These insights not only extend the scope of research in the realm of green digital assets but also highlight crucial implications for investors, regulatory bodies, and risk managers. This research underscores the need for a nuanced understanding of the relationship between emerging green digital assets and conventional energy sources, redefining the boundaries of green investment strategies and risk management practices.