Is Bitcoin ready to be a widespread payment method? Using price volatility and setting strategies for merchants

Simona-Vasilica Oprea (), Irina Alexandra Georgescu and Adela Bâra
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Simona-Vasilica Oprea: Bucharest University of Economic Studies
Irina Alexandra Georgescu: Bucharest University of Economic Studies
Adela Bâra: Bucharest University of Economic Studies

Electronic Commerce Research, 2024, vol. 24, issue 2, No 20, 1267-1305

Abstract: Abstract Bitcoin has gradually gained acceptance as a payment method that, unlike electronic payments in dollars or euros, passes through the international trading system with zero or lower fees. Moreover, Bitcoin and e-commerce have become increasingly intertwined in recent years as cryptocurrencies gain mainstream acceptance. In this paper, we analyze Bitcoin price evolution from September 2014 until July 2023, factors that influence price volatility and assess its future volatility using Autoregressive Conditional Heteroskedasticity (ARCH) models that predict the volatility of financial returns to conceive strategies for merchants that accept Bitcoin as a payment option. The Generalized ARCH model (GARCH) extends the model to capture more persistent volatility patterns. Further, we estimate symmetric and asymmetric GARCH (1,1)-type models with normal and non-normal innovations. The best proved to be EGARCH (1,1) with t-distribution innovation. To assist merchants in making decisions regarding Bitcoin adoption, two concepts are relevant: the EGARCH model and VaR. EGARCH model is used to forecast the volatility of the financial asset, while VaR is a widely used risk management tool that estimates the potential loss in value of a portfolio over a defined period. For a merchant holding Bitcoin, VaR assists in understanding the maximum expected loss over a certain time frame with a certain level of confidence (like 95% or 99%). The results show that a VaR coverage of 0.044 at a 5% probability level suggests that there is 95% confidence that the maximum loss will not exceed 4.4% of the investment value.

Keywords: Price volatility; Cryptocurrency; GARCH; e-commerce; Payment with Bitcoin; Merchants’ strategies; Dark-bright-tulip-idea-normality facets (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10660-024-09812-x

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