The Effect of Cryptocurrency on Exchange Rate of China: Case Study of Bitcoin

Riska Astuti () and Fazira Nadia

MPRA Paper from University Library of Munich, Germany

Abstract: In recent years, there have been many significant changes in commercial transactions. Not only e-commerce continues to grow, but also the form of payment services and service providers are consistently growing, such as virtual currency. One of virtual currency that quite popular is cryptocurrency especially Bitcoin. China became the country with the largest Bitcoin market in the world in the past few years. However, due to the concerns about money laundering and threats to China's financial stability and affecting the domestic currency, the Chinese government has formed a strict policy on Bitcoin. Therefore, nowadays, China is no longer the largest Bitcoin market in the world. Regarding the recently implemented policy, this study aims to analyze whether Bitcoin does affect China's exchange rate. The main independent variables in this research are specified to Bitcoin price volatility from BTCE, and controlled with the variable of the current account, inflation, and money supply. Monthly time series data from November 2012 until July 2017 is analyzed using autoregressive distributed lag (ARDL). The estimation results show that Bitcoin price volatility significantly affects the exchange rate in the long run. The higher of Bitcoin price volatility implies higher risk. The negative sign in the coefficient suggests that when Bitcoin's price volatility increases, investors tend to switch their investments on real currency will be preferable so that the exchange rate will be appreciated.

Keywords: Cryptocurrency; Bitcoin; Exchange Rate; ARDL; China (search for similar items in EconPapers)
JEL-codes: E52 G15 G18 (search for similar items in EconPapers)
Date: 2018-09-12, Revised 2019-04-01
New Economics Papers: this item is included in nep-cna, nep-mac, nep-mon, nep-pay and nep-tra
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