Exploring the driving forces of the Bitcoin currency exchange rate dynamics: an EGARCH approach

Siwen Zhou

Empirical Economics, 2021, vol. 60, issue 2, No 2, 557-606

Abstract: Abstract Bitcoin is a virtual currency scheme that is characterised by a decentralised network and cryptographic transfer verification. It has attracted much public attention due to its innovative technology and its high currency exchange rate volatility. In this paper, Bitcoin’s exchange rate movement from 2011 to 2018 and its relationship with the global financial markets are explored using an EGARCH framework. The results are as follows. First, fundamentals and Bitcoin-related specific events play a critical role in the formation of its exchange rate. Second, the impact on Bitcoin of regulation-related events indicates that market sentiment responds to market regulation statements. Third, news coverage is an essential factor in driving its volatility. Fourth, Bitcoin can be a hedge in times of low uncertainty in global financial markets and can also serve as a safe haven against high economic uncertainty worldwide, but with increasing global financial uncertainty, it is likely to move with the markets and therefore cannot serve as a hedge or safe haven against stock market crashes. Lastly, the positive effect of global expansionary monetary policy on Bitcoin’s exchange rate is marginal enough to rule out the involvement of central banks worldwide in the inflation of Bitcoin’s exchange rate over the years, as may have been the case with many asset prices after the 2008 US financial crisis.

Keywords: Bitcoin; EGARCH; Event analysis; Reuters news; Financial markets (search for similar items in EconPapers)
JEL-codes: C22 C52 E52 F31 G12 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (7)

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DOI: 10.1007/s00181-019-01776-4

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