1. Introduction
The rapid growth of cryptocurrencies has made them a popular diversification tool for investors (Ali et al., 2024). Despite their weak correlation with traditional assets like stocks, commodities, and precious metals, cryptocurrencies offer attractive returns, positioning them as alternative investments (Guesmi et al., 2019; Okorie & Lin, 2020). Often dubbed "digital gold" due to their gold-like properties (Rudolf et al., 2021), cryptocurrencies are reshaping financial portfolios globally.
Cryptocurrency Development and GCC Stock Markets
The Gulf Cooperation Council (GCC) region has seen exponential growth in cryptocurrency adoption. The Middle East and North Africa (MENA) accounted for 9.2% of global crypto transactions in 2021–2022 (Chinalysis, 2022), with the UAE, Saudi Arabia, and Turkey leading in adoption (Chinalysis, 2023). The GCC crypto market is projected to grow at 53.85% annually from 2024–2032 (IMARC Group, 2023), driven by digital transformation and economic diversification.
As Islamic nations, GCC countries face unique challenges regarding cryptocurrency’s compliance with Shari’ah principles. Unlike conventional finance, Islamic finance prohibits interest (riba), excessive uncertainty (gharar), and speculation (maysir). This distinction influences investment behaviors, with Islamic stocks focusing on sectors like technology, healthcare, and real estate (Delle Foglie & Panetta, 2020).
This study examines how cryptocurrency returns impact Islamic vs. conventional stock markets in the GCC, with a focus on structural changes after the 2017–2018 crypto crash.
2. Literature Review and Theoretical Framework
2.1. Literature Review
Research highlights cryptocurrencies' role in portfolio diversification (Corbet et al., 2018) and their volatility spillovers into stock markets (Elroukh, 2024). Key findings include:
- Bitcoin negatively affects conventional stocks but shows weaker ties to Islamic equities (Sami & Abdallah, 2021).
- Islamic stocks often serve as safe havens during crises (Mensi et al., 2015), exhibiting lower systemic risk (Sensoy, 2016).
2.2. Theoretical Framework
The study draws on:
- Modern Portfolio Theory: Cryptocurrencies diversify risk but may compete with stocks for capital.
- Behavioral Theories: Investor conservatism and gradual information diffusion explain asymmetric impacts on Islamic vs. conventional markets (Maitra et al., 2022).
Hypotheses
- H1: Cryptocurrency returns negatively impact both Islamic and conventional GCC stocks, with stronger effects on conventional markets.
- H2: The 2017–2018 crash altered this relationship, decoupling Islamic stocks from crypto volatility.
3. Data and Methodology
3.1. Data
- Cryptocurrencies: Top 10 by market cap (e.g., Bitcoin, Ethereum).
- Stock Indices: Islamic and conventional indices from 5 GCC countries (2016–2019).
- Control Variables: Democratic accountability, investment freedom.
3.2. Methods
Panel data techniques (Pooled OLS, fixed/random effects) tested hypotheses across:
- Full period (2016–2019)
- Pre-crash (2016–2017)
- Post-crash (2018–2019)
4. Results and Discussion
Key Findings
| Period | Islamic Stocks | Conventional Stocks |
|-----------------|----------------|---------------------|
| Full (2016–2019) | Moderate negative impact (-0.008, p < 0.05) | Strong negative impact (-0.010, p < 0.01) |
| Pre-crash | Insignificant | Weak negative (-0.009, p < 0.10) |
| Post-crash | Insignificant | Significant negative (-0.009, p < 0.05) |
Discussion
- Cryptocurrencies compete with conventional stocks for investor capital, explaining their stronger negative correlation.
- Islamic stocks’ resilience post-crash aligns with their risk-averse, asset-backed nature under Shari’ah law.
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5. Conclusions and Policy Implications
Key Takeaways
- Cryptocurrencies pose greater risks to conventional GCC stocks than Islamic equities.
- Post-crash, Islamic stocks decoupled from crypto volatility, reinforcing their safe-haven status.
Recommendations
- Policymakers: Regulate crypto markets to mitigate spillover effects on conventional stocks.
- Investors: Use Islamic stocks for hedging against crypto-driven volatility.
Future Research
Extend analysis to post-COVID-19 data and include Saudi Arabia for broader insights.
FAQs
Q1: How do cryptocurrencies impact GCC stock markets?
A: They negatively affect conventional stocks more than Islamic equities due to differing investor behaviors.
Q2: Why are Islamic stocks less affected by crypto volatility?
A: Shari’ah compliance discourages speculative investments, reducing exposure to crypto risks.
Q3: Did the 2017 crypto crash change this relationship?
A: Yes, Islamic stocks became decoupled from crypto markets post-crash, while conventional stocks remained vulnerable.
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