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

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Introduction 
Empirical Analysis 
Conclusion 
An Analysis of Bitcoin Exchange Rates 
Jake Smith 
University of Houston 
Ha...

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Introduction 
Empirical Analysis 
Conclusion 
What is Bitcoin? B 
“Bitcoins are digital coins which are not issued by any ...

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Introduction 
Empirical Analysis 
Conclusion 
Economics of Bitcoin 
How to characterize bitcoins? 
Relative prices 
Bitcoi...

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

  1. 1. Introduction Empirical Analysis Conclusion An Analysis of Bitcoin Exchange Rates Jake Smith University of Houston Hashers United Conference Download Working Paper Here 10 October 2014 Jake Smith An Analysis of Bitcoin Exchange Rates
  2. 2. Introduction Empirical Analysis Conclusion What is Bitcoin? B “Bitcoins are digital coins which are not issued by any government, bank, or organization and rely on cryptographic protocols and a distributed network of users to mint, store, and transfer.” (Ron and Shamir, 2012) Introduced by the pseudonymous Satoshi Nakamoto in 2009 “Anonymous” peer-to-peer transferability Traded for currency as well as goods and services Non-fiat, non-commodity Jake Smith An Analysis of Bitcoin Exchange Rates
  3. 3. Introduction Empirical Analysis Conclusion Economics of Bitcoin How to characterize bitcoins? Relative prices Bitcoin exchange rates vs. conventional exchange rates What explains bitcoin exchange rate fluctuations? Predictability? Jake Smith An Analysis of Bitcoin Exchange Rates
  4. 4. Introduction Empirical Analysis Conclusion Preview of Results Implied and Market rates are highly cointegrated Innovations in the conventional market have persistent eects in the bitcoin market Innovation in the bitcoin market have no eects on the conventional market Rapid return to parity Exchange rate fluctuations explain much of the bitcoin price volatility Behaves much like physical gold Jake Smith An Analysis of Bitcoin Exchange Rates
  5. 5. Introduction Empirical Analysis Conclusion Motivation Most popular “cryptocurrency” Sizable market $6.4 billion market cap., $90 million transactions/day M2 = $11.4 trillion, Visa processes $12 billion transactions/day Popular in news and blogs Attention in computer science literature Very little research on the economics of bitcoin Jake Smith An Analysis of Bitcoin Exchange Rates
  6. 6. Introduction Empirical Analysis Conclusion Yermack, 2013 Bitcoin exchange rates (USD price of bitcoins) “Bitcoin has exchange rate volatility an order of magnitude higher than the volatility of widely used currencies.” Uncorrelated with “bona fide” currencies Behaves more like a speculative asset than a currency Jake Smith An Analysis of Bitcoin Exchange Rates
  7. 7. Introduction Empirical Analysis Conclusion Contribution Think of bitcoin as a digital commodity (gold) The price of a bitcoin is not an exchange rate but commodity price The relative price of an asset traded in two dierent currencies implies an exchange rate How does the exchange rate implied by the relative price of bitcoins compare to “bona fide” exchange rates? Jake Smith An Analysis of Bitcoin Exchange Rates
  8. 8. Introduction Empirical Analysis Conclusion Data Methodology Results Bitcoin as Commodity Money Data Bitcoin prices 1 September 2011 - 31 January 2014 $=B AC=B £=B A$=B Mt. Gox Implied exchange rate = relative price of bitcoins $=AC = $=B AC=B $=£ = $=B £=B $=A$ = $=B A$=B Gold Implied exchange rate = relative price of gold FRED for conventional market exchange rates Jake Smith An Analysis of Bitcoin Exchange Rates
  9. 9. Introduction Empirical Analysis Conclusion Data Methodology Results Bitcoin as Commodity Money Prices Jake Smith An Analysis of Bitcoin Exchange Rates
  10. 10. Introduction Empirical Analysis Conclusion Data Methodology Results Bitcoin as Commodity Money $=AC Exchange Rates Jake Smith An Analysis of Bitcoin Exchange Rates
  11. 11. Introduction Empirical Analysis Conclusion Data Methodology Results Bitcoin as Commodity Money $=£ Exchange Rates Jake Smith An Analysis of Bitcoin Exchange Rates
  12. 12. Introduction Empirical Analysis Conclusion Data Methodology Results Bitcoin as Commodity Money $=A$ Exchange Rates Jake Smith An Analysis of Bitcoin Exchange Rates
  13. 13. Introduction Empirical Analysis Conclusion Data Methodology Results Bitcoin as Commodity Money $=AC Spread Jake Smith An Analysis of Bitcoin Exchange Rates
  14. 14. Introduction Empirical Analysis Conclusion Data Methodology Results Bitcoin as Commodity Money $=£ Spread Jake Smith An Analysis of Bitcoin Exchange Rates
  15. 15. Introduction Empirical Analysis Conclusion Data Methodology Results Bitcoin as Commodity Money $=A$ Spread -.1 0 .1 .2 Nominal Exchange Rate Spread Jake Smith An Analysis of Bitcoin Exchange Rates 1Jul11 1Jan12 1Jul12 1Jan13 1Jul13 1Jan14
  16. 16. Introduction Empirical Analysis Conclusion Data Methodology Results Bitcoin as Commodity Money Johansen Test for Cointegration Series appear highly cointegrated Johansen tests for cointegration all show evidence of one cointegrating vector Table 2 y on x is misspecified Fit a Vector Error Correction Model Jake Smith An Analysis of Bitcoin Exchange Rates
  17. 17. Introduction Empirical Analysis Conclusion Data Methodology Results Bitcoin as Commodity Money VEC Results Table 3 Cointegrating vector is highly significant for all three currencies Bitcoin implied rates rapidly return to equilibrium Convention market rate does not respond to disequilibrium Fail to reject the null that the equilibrium condition is parity Innovations to the market rate have significant and persistent eects (R2 as high as 0.49) on the implied rate but not vice versa Jake Smith An Analysis of Bitcoin Exchange Rates
  18. 18. Introduction Empirical Analysis Conclusion Data Methodology Results Bitcoin as Commodity Money Market-to-Implied IRF for $=AC Rates Jake Smith An Analysis of Bitcoin Exchange Rates
  19. 19. Introduction Empirical Analysis Conclusion Data Methodology Results Bitcoin as Commodity Money Market-to-Implied IRF for $=£ Rates Jake Smith An Analysis of Bitcoin Exchange Rates
  20. 20. Introduction Empirical Analysis Conclusion Data Methodology Results Bitcoin as Commodity Money Market-to-Implied IRF for $=A$ Rates Jake Smith An Analysis of Bitcoin Exchange Rates
  21. 21. Introduction Empirical Analysis Conclusion Data Methodology Results Bitcoin as Commodity Money Implied-to-Market IRF for $=AC Rates Jake Smith An Analysis of Bitcoin Exchange Rates
  22. 22. Introduction Empirical Analysis Conclusion Data Methodology Results Bitcoin as Commodity Money Implied-to-Market IRF for $=£ Rates Jake Smith An Analysis of Bitcoin Exchange Rates
  23. 23. Introduction Empirical Analysis Conclusion Data Methodology Results Bitcoin as Commodity Money Implied-to-Market IRF for $=A$ Rates Jake Smith An Analysis of Bitcoin Exchange Rates
  24. 24. Introduction Empirical Analysis Conclusion Data Methodology Results Bitcoin as Commodity Money Is Bitcoin a Commodity? Replicate the methodology using gold prices and implied exchange rates ($/AC, $/£) One highly significant cointegrating vector for both exchange rates (Table 4) Rapid return to parity Arbitrage opportunities much smaller Convention market rate does not respond to disequilibrium, gold prices do all the changing (Table 5) Jake Smith An Analysis of Bitcoin Exchange Rates
  25. 25. Introduction Empirical Analysis Conclusion Data Methodology Results Bitcoin as Commodity Money Market-to-Implied IRF for $=AC Rates Jake Smith An Analysis of Bitcoin Exchange Rates
  26. 26. Introduction Empirical Analysis Conclusion Data Methodology Results Bitcoin as Commodity Money Market-to-Implied IRF for $=£ Rates Jake Smith An Analysis of Bitcoin Exchange Rates
  27. 27. Introduction Empirical Analysis Conclusion Data Methodology Results Bitcoin as Commodity Money Implied-to-Market IRF for $=AC Rates Jake Smith An Analysis of Bitcoin Exchange Rates
  28. 28. Introduction Empirical Analysis Conclusion Data Methodology Results Bitcoin as Commodity Money Implied-to-Market IRF for $=£ Rates Jake Smith An Analysis of Bitcoin Exchange Rates
  29. 29. Introduction Empirical Analysis Conclusion Conclusion Relative bitcoin prices are exchange rates Yermack (2013) incorrect: bitcoin exchange rates highly correlated with “bona fide” currencies Innovation in the bitcoin market have no eects on the conventional market Rapid return to parity One-way causality explains a significant portion of bitcoin price volatility Mirrors the behavior of other physical assets such as physical gold Jake Smith An Analysis of Bitcoin Exchange Rates
  30. 30. Introduction Empirical Analysis Conclusion Questions? Questions? Jake Smith An Analysis of Bitcoin Exchange Rates

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