Gold, platinum, and expected Bitcoin returns

Abstract

This study examines the prediction power of the ratio of gold to platinum prices (GP) on Bitcoin. By using different models and data sources for Bitcoin, we find that GP predicts future Bitcoin return. When the price of gold relative to platinum increases, Bitcoin return also goes up. This finding is consistent with previous studies and contributes to the ongoing discussion whether GP can be used as an indicator for aggregate market risk. Using variance decomposition, we also find that volatility in the gold and platinum market can influence Bitcoin volatility and that this relationship shows time-varying dependency. Finally, our results are robust to including new year effects and data of different frequency. Hence, this paper contributes to the current literature of Bitcoin by showing that GP provides an important proxy of risk in the economy.