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Assessing the relationship between bitcoin price dynamics and global financial markets

Since its birth, bitcoin has evolved to become a fascinating asset in global financial markets. Bitcoin’s extreme price swings have urged many researchers and financial observers to study its price dynamic and to attempt to correlate it with traditional financial markets.

A recently published research study attempts to analyze the effects of global financial markets’ macroeconomic influences on the price of bitcoin. The study’s main goal was to determine if there is a positive or negative relationship between bitcoin and global financial markets. Throughout this article, we will take a look at the results presented via this interesting study.

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Methods used to study correlation between bitcoin and financial markets:

The study attempts to find a correlation between bitcoin price and financial markets’ macroeconomic implications including EUR/USD, CNY/USD, S&P 500 index, Capitalization Weighted Stock Market Index, Eurostixx 50 Index, gold price, MSCI Emerging Markets Index, Bitcoin’s Google search trends, and the overall number of bitcoin transactions. A linear regression based model was utilized to cover the period between 2012 and 2017, which was then broken down into two other sub-samples.

Additionally to the used regression analysis based model, an event study was deployed for this research study in order to analyze two main aspects. The first aspect represents the impact of financial markets’ news on the price of bitcoin, and the second aspect represents the impact of bitcoin’s news on dynamics of the financial markets.

Results of the study:

Results of the study denote that the selected variables were not the only determinants of bitcoin price movements with S&P 500, CNY/USD, Bitcoin’s Google search trends, and the overall number of bitcoin transactions being the most relevant variables during the period of the study. The two studied sub-periods illustrate how the relationship between bitcoin price and financial markets changed dramatically over time. During the first period, only CNY/USD, Bitcoin’s Google search trends, and overall number of bitcoin transactions could be positively correlated with changes in bitcoin price. During the second period of the study, only the S&P 500 and Bitcoin’s Google search trends were the variables that exhibited significant correlation with changes in bitcoin price.

On the other hand, studying events associated with bitcoin and financial markets concluded that bitcoin events do not impact the financial market, while financial markets’ news can significantly impact bitcoin price. Collectively, the results obtained denote a lack of consistency due to the fact that analyzing events and news emphasizes the fact that only financial markets’ news can impact bitcoin price, but not the other way around. On the other hand, the regression analysis model proves that bitcoin represents a relatively new form of asset in the market and that it is not backed by a real value. This can make it more prone to change in its relationship with the global financial markets during the near future.

Bitcoin as a safe haven:

Even though it might seem a relatively illogical hypothesis, bitcoin was once deemed a safe haven against the failures of the world’s traditional economic model. This was generally true following the global financial crisis that took place in 2012. Some speculated that a significant amount of fiat money was transformed into bitcoin, mainly to promote anonymity and evade the tracing of funds. To question whether or not bitcoin can be a safe haven, the study analyzed the relationship between the price of bitcoin and the Financial Stress Index (FSI) and the price of gold in CHF. The FSI serves as a general measure of financial uncertainty. Gold is utilized because it is used for long term value storage, while the CHF is considered one of the world’s most stable currencies. As such, if bitcoin is really a safe haven, then it would have a positive correlation with the FSI and gold prices in CHF.

There is one period that exhibited a positive correlation between the FSI and the price of bitcoin. This period was that of the Cypriot Crisis, when increases in the FSI were associated with a rise in bitcoin price, too. On the other hand, there were no periods exhibiting a positive correlation between the price of bitcoin and gold prices in CHF. Accordingly, we can conclude that bitcoin cannot be considered a safe haven, mainly due to its high levels of volatility.

Final thoughts:

Since its advent, the dynamics of bitcoin price have been a controversial topic for economists and financial observers. The CNY is by far the fiat currency that exhibits the tightest connection to the price of bitcoin. This can be attributed to the large percentage of bitcoin investors in China. More studies are needed to explore the relationship between bitcoin price dynamics and global financial market movements.

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