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The Effect of Cryptocurrency on Exchange Rate of China: Case Study of Bitcoin

Author

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  • Riska Dwi, Astuti
  • Nadia, Fazira

Abstract

In recent years, there have been many significant changes in commercial transactions. Not only e-commerce continues to grow, but also the form of payment services and service providers are consistently growing, such as virtual currency. One of virtual currency that quite popular is cryptocurrency especially Bitcoin. China became the country with the largest Bitcoin market in the world in the past few years. However, due to the concerns about money laundering and threats to China's financial stability and affecting the domestic currency, the Chinese government has formed a strict policy on Bitcoin. Therefore, nowadays, China is no longer the largest Bitcoin market in the world. Regarding the recently implemented policy, this study aims to analyze whether Bitcoin does affect China's exchange rate. The main independent variables in this research are specified to Bitcoin price volatility from BTCE, and controlled with the variable of the current account, inflation, and money supply. Monthly time series data from November 2012 until July 2017 is analyzed using autoregressive distributed lag (ARDL). The estimation results show that Bitcoin price volatility significantly affects the exchange rate in the long run. The higher of Bitcoin price volatility implies higher risk. The negative sign in the coefficient suggests that when Bitcoin's price volatility increases, investors tend to switch their investments on real currency will be preferable so that the exchange rate will be appreciated.

Suggested Citation

  • Riska Dwi, Astuti & Nadia, Fazira, 2018. "The Effect of Cryptocurrency on Exchange Rate of China: Case Study of Bitcoin," MPRA Paper 93052, University Library of Munich, Germany, revised 01 Apr 2019.
  • Handle: RePEc:pra:mprapa:93052
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    File URL: https://mpra.ub.uni-muenchen.de/93052/1/MPRA_paper_93052.pdf
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    References listed on IDEAS

    as
    1. Cheah, Eng-Tuck & Fry, John, 2015. "Speculative bubbles in Bitcoin markets? An empirical investigation into the fundamental value of Bitcoin," Economics Letters, Elsevier, vol. 130(C), pages 32-36.
    2. repec:eee:finlet:v:25:y:2018:i:c:p:103-110 is not listed on IDEAS
    3. repec:eee:ecolet:v:158:y:2017:i:c:p:3-6 is not listed on IDEAS
    4. repec:eee:finlet:v:16:y:2016:i:c:p:85-92 is not listed on IDEAS
    5. Adam Hayes, 2015. "A Cost of Production Model for Bitcoin," Working Papers 1505, New School for Social Research, Department of Economics.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Cryptocurrency; Bitcoin; Exchange Rate; ARDL; China;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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