An Analysis of Bitcoin Exchange Rates

28 Pages Posted: 10 Sep 2014 Last revised: 4 May 2016

See all articles by Jacob Smith

Jacob Smith

University of Houston, College of Liberal Arts & Social Sciences, Department of Economics, Students

Date Written: May 3, 2016

Abstract

Bitcoins are digital gold. They are a purely electronic commodity traded for speculative purposes as well as in exchange for goods and services. Just like physical gold, the relative price of bitcoins denominated in different currencies implies a nominal exchange rate. This is a departure from previous literature which treats bitcoin prices themselves as nominal exchange rates. I argue that treating prices as exchange rates is inappropriate as one would not consider the price of physical gold to be an exchange rate. Therefore, this paper characterizes the behavior of nominal exchange rates implied by relative bitcoin prices. I show that the implied nominal exchange rate is highly cointegrated with the nominal exchange rate determined in conventional foreign currency exchange markets. I also show that the direction of causality flows from the conventional markets to the bitcoin market and not vice-versa which can explain much of the volatility in bitcoin prices.

Keywords: Bitcoin, Cointegration, Exchange Rates, Cyrptocurrency

JEL Classification: E42, E47, C3

Suggested Citation

Smith, Jacob, An Analysis of Bitcoin Exchange Rates (May 3, 2016). Available at SSRN: https://ssrn.com/abstract=2493797 or http://dx.doi.org/10.2139/ssrn.2493797

Jacob Smith (Contact Author)

University of Houston, College of Liberal Arts & Social Sciences, Department of Economics, Students ( email )

Houston, TX
United States

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