How Digital Assets and Carbon Investments Move Together: Implications for Sustainable Investing

What is it about?

This paper discusses the investment potential of carbon ETFs, namely CRBN and SMOG, in terms of price discovery and risk hedging into NFT and DeFI markets. We recognize the price-leading effect of the carbon market, especially during volatile market conditions. We also evaluate the bivariate diversification advantages of carbon ETFs, using the Markowitz Minimum variance Portfolio framework to estimate the hedge ratio and to select an optimal portfolio weight for carbon risk hedging. We find that carbon ETFs serve as a hedge against NFT and DeFI markets during 2020-2025 since they help in minimizing bivariate portfolio risks. CRBN was a major hedge and the weight increment was greater, whereas SMOG was more moderate but useful in risk reduction. These lessons highlight the key points of asset allocation and risk management, including green finance and metaverse regulations. These highlight the necessity to monitor the risks of the carbon market and suggest the application of Carbon ETFs to digital asset portfolios as a potential hedging tool.

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Photo by Stephen Dawson on Unsplash

Photo by Stephen Dawson on Unsplash

Why is it important?

EFTs and DeFi markets are highly volatile and exposed to regulatory and environmental risks. Carbon ETFs can act as effective hedging and diversification instruments, particularly during global crises. Supports sustainable investment decisions while aligning with climate and net-zero objectives. Bridges the research gap between digital assets and environmental finance.

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