Paper Title: Do Islamic Cryptocurrency and Bitcoin Co-move at Different Investment Horizons?

Author:        Mosharrof Hosen, Hassanudin Mohd Thas Thaker, Mohammad Nazim Uddin, Abdul Qoyum & Farhad Taghizadeh-Hesary

Publisher:    International Journal of Islamic and Middle Eastern Finance and Management, 18(5), 1039–1065

This study investigates whether Bitcoin and Islamic cryptocurrencies move in tandem with stock markets over varying investing time periods. In essence, the study investigates whether the rise and fall of these digital currencies corresponds with that of traditional stocks, and whether this link varies based on the length of investment horizon, such as weeks or years.

In terms of risk management and portfolio diversification, the researchers sought to determine how traditional cryptocurrencies, such as Bitcoin, stack up against digital currencies that adhere to Islamic law. Islamic cryptocurrencies, which are made to adhere to Shari’ah law—the moral and religious precepts of Islam—represent an intriguing advancement in digital finance.

Islamic digital currencies must refrain from a number of actions deemed prohibited by Islamic law, in contrast to traditional cryptocurrencies like Bitcoin. They cannot entail interest-based transactions (Riba), undue speculation or uncertainty (gharar), or gambling (maysir). Their frequent backing by physical assets, such as gold, gives them inherent stability and lessens the speculative bubbles that are typical of traditional cryptocurrencies, which is what makes them so intriguing.

The study compared the behaviour of two Islamic cryptocurrencies, X8X and Cardano, with more traditional choices, such as Bitcoin and Ethereum. Investors looking for both financial gains and adherence to religious precepts are drawn to these Islamic options.  The study used daily price data from November 2019 to July 2022 to perform a thorough analysis. Alongside key stock indices, such as the S&P 500, which represents worldwide markets, and the FTSE ASEAN, which represents Southeast Asian markets, the study looked at four cryptocurrencies: Bitcoin, Ethereum, X8X, and Cardano.

They examined how these assets moved in tandem over three different time horizons: short-term (1–16 days), medium-term (16–64 days), and long-term (more than 64 days) using the technique known as Continuous Wavelet Transform. By using this method, the study recorded the complex connections between cryptocurrencies and conventional markets over a range of investing periods, offering insights that could be overlooked by straightforward correlation research.

The study found intriguing distinctions between the long-term behaviour of conventional and Islamic cryptocurrencies in comparison to stock markets. Bitcoin showed a complicated relationship pattern; in the near run, it gave S&P 500 investors good diversification chances, but over time, it grew more and more linked with stocks, which would have diminished its usefulness as a hedge. Bitcoin, on the other hand, displayed the opposite trend with ASEAN markets, gradually decreasing its correlation and becoming a more effective long-term diversification tool for investors in Southeast Asia. In both markets, Ethereum was most advantageous for short-term investing strategies; but, over longer time horizons, its diversification advantages waned.

The story of the Islamic cryptocurrency was very different. With modest correlations to the S&P 500 and FTSE ASEAN indices over long periods of time, X8X and Cardano both proved to be excellent long-term diversification assets. According to this research, long-term investors of all faiths can benefit from the better portfolio protection features that Islamic cryptocurrencies provide, even though their primary purpose is religious conformity. For short-term trading techniques, where their correlations with stock markets were larger, these identical assets, however, demonstrated only modest advantages.

Furthermore, Bitcoin and Ethereum continue to be the more alluring choices for investors with short time horizons of a few days to a few weeks, especially when investing alongside S&P 500 companies. Although investors should be mindful of their growing association with traditional markets, these classic cryptocurrencies can offer tactical diversification advantages and the possibility of rapid returns. Because the benefits of Islamic cryptocurrencies mostly materialise over longer timeframes, short-term investors should proceed with care.

The environment for long-term investors is completely different. Even if religious compliance isn’t the main reason for investing, those who are constructing portfolios for the months or years to come should give Islamic cryptocurrencies like X8X and Cardano careful thought. These assets are great portfolio insurance against market downturns since they have shown a remarkable degree of independence from stock market fluctuations over extended periods of time. The long-term efficacy of Bitcoin is mostly dependent on geographic focus; it may not offer enough diversification for investments centred on the S&P 500, but it does well for portfolios with a significant ASEAN component.

Building Shari’ah-compliant portfolios presents particular difficulties for Muslim investors, but this study offers positive proof that Islamic cryptocurrencies are becoming more and more popular.

The analysis shows that religious observance need not come at the expense of investment returns or diversification advantages. Actually, as compared to traditional alternatives, Islamic cryptocurrencies seem to provide better long-term diversification features. Their stability and independence from conventional market movements may really be attributed to their asset-backed character and adherence to Islamic precepts regarding speculation and uncertainty.

Muslim investors can preserve their religious observance while possibly obtaining higher risk-adjusted returns in the long run thanks to this win-win scenario. Important developments in global financial integration are highlighted by the study, especially in relation to the way ASEAN markets deal with cryptocurrencies in comparison to international indices like the S&P 500. As indicated in the findings, there are notable regional variations in the linkages between cryptocurrencies and the stock market, which should guide both regulatory and investment plans. It might be necessary for policymakers to create standardised regulatory frameworks that take these regional differences into consideration while fostering financial stability, particularly in the ASEAN area.

The study also emphasises how Islamic finance is becoming more and more significant in the global bitcoin ecosystem. Since a sizable percentage of international investors are Muslims, the creation and uptake of digital assets that adhere to Shari’ah could change the cryptocurrency markets. Non-Muslim investors may be drawn to Islamic cryptocurrencies due to their greater diversification features, which might spur market growth and wider acceptance.

Investment timeframe should be the primary determinant of whether to choose Islamic or conventional cryptocurrencies rather than merely religious concerns. Conventional cryptocurrencies like Bitcoin and Ethereum are still useful for short-term strategy, but Islamic cryptocurrencies are excellent for long-term portfolio diversification.

The results cast doubt on the notion that religious observance inevitably degrades investing performance, arguing that Islamic cryptocurrencies can provide better risk management features for cautious investors. Building successful investment strategies requires an awareness of the complex relationships between various digital assets and traditional markets, which are becoming more and more important as cryptocurrency markets continue to develop.

This analysis should not be interpreted as financial advice because it is based on scholarly research. Before considering an investment, investors should always seek advice from knowledgeable financial experts and carry out their own research.