Synthetic asset-backed stablecoins outperform as global equity hedges

Background and Motivation

In an era marked by geopolitical tensions, pandemic aftershocks, and banking crises, investors worldwide are actively seeking reliable assets to shield their portfolios from market downturn. While traditional safe havens like gold have long played this role, the rise of digital currencies has introduced new candidates, particularly stablecoins, which are designed to maintain a steady value. However, not all stablecoins are built the same. Their risk-mitigation potential depends critically on what backs them: fiat currencies, cryptocurrencies, algorithms, commodities, or synthetic assets. This study, conducted by researchers from Nankai University, University of Hull, and Tianjin University, systematically investigates whether and how different types of stablecoins can act as hedges or safe havens for international stock indices.

Methodology and Scope

The research analysed daily data from 44 stablecoins and 30 major stock indices across 20 countries and regions from October 2022 to September 2024. Using a Dynamic Conditional Correlation Generalised Autoregressive Conditional Heteroskedasticity (DCC-GARCH) model, the team measured time-varying correlations between each stablecoin and index. A key innovation was categorising stablecoins into five distinct groups based on their collateral mechanisms: fiat-backed, algorithmic, crypto-collateralised, physical gold-backed, and synthetic asset-backed. Rolling window analysis was also applied to assess short-term hedging behaviours. This approach allowed for a granular, type-specific evaluation rather than treating “stablecoins” as a monolithic category.

Key Findings and Contributions

The study reveals striking disparities in performance across stablecoin types. Synthetic asset-backed stablecoins demonstrated the strongest hedging capabilities, serving as strong hedges for 21 out of 30 indices and as weak safe havens in the same number. In contrast, fiat-backed stablecoins, the largest category by market share, showed very limited ability to mitigate risk. Algorithmic and crypto-collateralised stablecoins displayed moderate and inconsistent hedge or safe-haven properties, while gold-backed versions provided stability but with narrower effectiveness.

These findings challenge the blanket perception of stablecoins as uniform safe havens. They underscore that the underlying collateral design is a decisive factor in financial resilience, offering the first comprehensive, classification-based analysis of stablecoins in a global equity context.

Why It Matters

As digital assets become more intertwined with traditional finance, understanding their true risk-management utility is crucial for investors, portfolio managers, and regulators. This research highlights that investors cannot assume all stablecoins will protect against equity downturns—some may even fail under stress. For policymakers, the results underscore the need for tailored regulatory approaches: fiat-backed stablecoins require stringent reserve oversight, while decentralised synthetic models pose novel challenges due to their complexity and lack of centralised control.

Practical Applications

• For Investors: Portfolio diversification strategies should prioritise synthetic asset-backed stablecoins for hedging global equity exposure, rather than relying on more common fiat-backed versions.
• For Financial Advisors: Recommendations should include stablecoin type analysis as part of risk assessment, especially during periods of market volatility.
• For Regulators: Frameworks like the EU’s MiCA regulation must account for fundamental design differences between stablecoin categories, balancing innovation with investor protection.
• For Future Research: The study calls for more dynamic models that capture structural breaks and interdependencies between global indices, as well as higher-frequency data to refine hedging insights.

Discover high-quality academic insights in finance from this article published in China Finance Review International. Click the DOI below to read the full-text!