Global and local drivers of Bitcoin trading vis-à-vis fiat currencies

Paola Di Casola, Maurizio Michael Habib and David Tercero-Lucas

No 2868, Working Paper Series from European Central Bank

Abstract: We analyse the drivers of Bitcoin transactions against 44 fiat currencies in the largest peer-to-peer crypto exchanges. Momentum and volatility in the cryptoasset market, as well as volatility and liquidity in global financial markets do matter for Bitcoin trading. There is suggestive evidence of a global crypto cycle driven by speculative motives. However, in emerging and developing economies (EMDEs), Bitcoin seems to offer also transactional benefits, since trading increases when the value of the domestic currency is unstable. Proxies of banking depth and digitalisation are negatively correlated with the currency loadings on the global factor, indicating that crypto-assets may offer a speculative alternative to traditional finance when this is not available, especially in EMDEs where the share of younger risk-prone population is higher. Our results clearly point to potential financial stability risks from cryptoisation in EMDEs with low levels of financial development and unstable fiat currencies. JEL Classification: E42, F21, F24, F32, F38, G15, O33

Keywords: Bitcoin; digital currencies; financial development; peer-to-peer exchanges (search for similar items in EconPapers)
Date: 2023-11
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-ifn and nep-pay
Note: 334027
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20232868

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