An analysis of bitcoin exchange rates by Jake Smith (University of Houston)

IntroductionEmpirical Analysis

Conclusion

An Analysis of Bitcoin Exchange Rates

Jake Smith

University of HoustonHashers United Conference

Download Working Paper Here

10 October 2014

Jake Smith An Analysis of Bitcoin Exchange Rates

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2493797


Conclusion

What is Bitcoin? B

“Bitcoins are digital coins which are not issued by anygovernment, bank, or organization and rely oncryptographic protocols and a distributed network of usersto mint, store, and transfer.” (Ron and Shamir, 2012)Introduced by the pseudonymous Satoshi Nakamoto in2009“Anonymous” peer-to-peer transferabilityTraded for currency as well as goods and servicesNon-fiat, non-commodity



Conclusion

Economics of Bitcoin

How to characterize bitcoins?Relative pricesBitcoin exchange rates vs. conventional exchange ratesWhat explains bitcoin exchange rate fluctuations?Predictability?



Conclusion

Preview of Results

Implied and Market rates are highly cointegratedInnovations in the conventional market have persistenteffects in the bitcoin marketInnovation in the bitcoin market have no effects on theconventional marketRapid return to parityExchange rate fluctuations explain much of the bitcoinprice volatilityBehaves much like physical gold



Conclusion

Motivation

Most popular “cryptocurrency”Sizable market

$6.4 billion market cap., $90 million transactions/dayM2 = $11.4 trillion, Visa processes $12 billiontransactions/day

Popular in news and blogsAttention in computer science literatureVery little research on the economics of bitcoin



Conclusion

Yermack, 2013

Bitcoin exchange rates (USD price of bitcoins)“Bitcoin has exchange rate volatility an order of magnitudehigher than the volatility of widely used currencies.”Uncorrelated with “bona fide” currenciesBehaves more like a speculative asset than a currency



Conclusion

Contribution

Think of bitcoin as a digital commodity (gold)The price of a bitcoin is not an exchange rate butcommodity priceThe relative price of an asset traded in two differentcurrencies implies an exchange rateHow does the exchange rate implied by the relative priceof bitcoins compare to “bona fide” exchange rates?



Conclusion

DataMethodologyResultsBitcoin as Commodity Money

Data

Bitcoin prices 1 September 2011 - 31 January 2014$/BAC/B£/BA$/B

Mt. GoxImplied exchange rate = relative price of bitcoins

$/AC = $/BAC/B

$/£ = $/B£/B

$/A$ = $/BA$/B

Gold Implied exchange rate = relative price of goldFRED for conventional market exchange rates



Conclusion


Prices



Conclusion


$/AC Exchange Rates



Conclusion


$/£ Exchange Rates



Conclusion


$/A$ Exchange Rates



Conclusion


$/AC Spread



Conclusion


$/£ Spread



Conclusion


$/A$ Spread-.

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1Jul11 1Jan12 1Jul12 1Jan13 1Jul13 1Jan14Date



Conclusion


Johansen Test for Cointegration

Series appear highly cointegratedJohansen tests for cointegration all show evidence of onecointegrating vectorTable 2∆y on ∆x is misspecifiedFit a Vector Error Correction Model



Conclusion


VEC Results

Table 3Cointegrating vector is highly significant for all threecurrenciesBitcoin implied rates rapidly return to equilibriumConvention market rate does not respond todisequilibriumFail to reject the null that the equilibrium condition isparityInnovations to the market rate have significant andpersistent effects (R2 as high as 0.49) on the implied ratebut not vice versa



Conclusion


Market-to-Implied IRF for $/AC Rates



Conclusion


Market-to-Implied IRF for $/£ Rates



Conclusion


Market-to-Implied IRF for $/A$ Rates



Conclusion


Implied-to-Market IRF for $/AC Rates



Conclusion


Implied-to-Market IRF for $/£ Rates



Conclusion


Implied-to-Market IRF for $/A$ Rates



Conclusion


Is Bitcoin a Commodity?

Replicate the methodology using gold prices and impliedexchange rates ($/AC, $/£)One highly significant cointegrating vector for bothexchange rates (Table 4)Rapid return to parityArbitrage opportunities much smallerConvention market rate does not respond todisequilibrium, gold prices do all the changing (Table 5)



Conclusion


Market-to-Implied IRF for $/AC Rates



Conclusion


Market-to-Implied IRF for $/£ Rates



Conclusion


Implied-to-Market IRF for $/AC Rates



Conclusion


Implied-to-Market IRF for $/£ Rates



Conclusion

Conclusion

Relative bitcoin prices are exchange ratesYermack (2013) incorrect: bitcoin exchange rates highlycorrelated with “bona fide” currenciesInnovation in the bitcoin market have no effects on theconventional marketRapid return to parityOne-way causality explains a significant portion of bitcoinprice volatilityMirrors the behavior of other physical assets such asphysical gold



Conclusion

Questions?

Questions?


Technology

An analysis of bitcoin exchange rates by Jake Smith (University of Houston)