Thabo J. Gopane. An Assessment of Inter-Market Volatility and Spillover Dynamics of Bitcoin as a Digital Asset. (ICDEc 2021)

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An Assessment of Inter-Market Volatility and Shock
Dynamics of Bitcoin as a Digital Asset
Thabo Gopane
University of Johannesburg
South Africa
6th International Conference in Digital Economy
15-17 July 2021, Virtual Presentation

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PROBLEM DEFINITION
Bitcoin and South African Financial Markets – who shocking who?
Financial shock dynamics ….
Bitcoin
Exch Rate
JSE
Stocks
USD/ZAR
Exch Rate
Relationship?

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BACKGROUND AND MOTIVATION - 1
❑ Cryptocurrency Market – was designed to operate:
o Digitally through cryptography, as a currency, and
o Free of 3rd party trusted authority
❑ Cryptocurrency is characterised by:
o Pseudo-anonymity,
o Independence,
o Double-spending protection, and
o Uneven recognition or acceptance by national governments, globally.
❑ Bitcoin as a proxy for Cryptocurrency market
o Bitcoin has alternatives (called Altcoins) mushroomed to 5 000, and counting…
o Bitcoin is the first born, and has a dominant market share of 50% - April 2021
o Which is the speediest to crossover? 1Trillion USD –in market capitalisation:
✓ Microsoft – 44 years
✓ Apple – 42 years
✓ Amazon – 24 years
✓ Google – 21 years
✓ Bitcoin - 12 years

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BACKGROUND AND MOTIVATION - 2
Fig 1. Source: Author’s own graphics
Google’s Bitcoin Search Index for the World & South Africa – Left scale
vs
Monthly Bitcoin Price in USD - Right Scale

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RELATED LITERATURE
❑ The ongoing research in Bitcoin and cryptocurrency:
o Currency properties (Ali et al., 2014; Bouoiyour & Selmi, 2015),
o Price evaluation (Dyhrberg, 2016)
o Asset selection and allocation (Platanakis & Urquhart, 2020).
o Monetary policy (Blundell Wignall, 2014; European Central Bank, 2015)
o Financial regulatory system (Financial Action Task Force on Money
Laundering, 2015).
o Risk hedging potentials (Bouri et al., 2017),
o Investment speculation (Baek and Elbeck, 2015),
o Portfolio diversification (Brière et al., 2015; Carpenter, 2016),

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IDENTITY AND CLASSIFICATION
Is Bitcoin a Currency or Financial Asset?
❑ Bitcoin’s financial classification - economists express divergent views, (Selgin, 2015).
❑ Should Bitcoin be classified as:
o currency,
o commodity,
o synthetic commodity or gold ?
❑ Some financial market researchers see Bitcoin as:
o Hybrid between precious metal and fiat currency (Baur et al., 2018), or
o Hybrid between gold and dollar (Dyhrberg, 2016),
❑ Some say: Bitcoin is not a currency (Yermack, 2015)

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EMPIRICAL DESIGN
❑ Divergent views aside, there is also plenty agreement about Bitcoin:
o Bitcoin was designed to operate as (virtual) currency, Nakamoto, (2008)
o Bitcoin fails the economics test of money (Yermack, 2015)
Bitcoin as financial asset (Smith, 2016) => the quote of BTC/USD is Bitcoin price.
❑ To derive the implied Bitcoin exchange rate,
o Divide USD/BTC by EUR/BTC
o Illustrative time plots show that the Implied Bitcoin Exchange rate:
✓ Differs from Bitcoin price graph, and
✓ It is more comparable to other financial time series

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EMPIRICAL DESIGN
Time Plot of Bitcoin Price & Implied Exchange Rate
. Source: Own graphics

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EMPIRICAL DESIGN
Time plots to compare Implied Bitcoin Exchange Rate

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EMPIRICAL DESIGN
Estimated Models
❑ Regression 1:
✓ Run Garch (1,1) – Retrieve, standardized residuals, and safe them.
❑ Regression 2:
✓ Run EGarch (1,1) - use residuals from (1) as shock (covariates).
✓ Interpret EGarch (1,1), and the shock covariates.

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ECONOMETRIC MODEL
Regression 1
𝑦𝑡= 𝑐𝑦𝑡−1 + 𝜀𝑡, ∀ 𝑡 = 1, 2, 3 … 𝑁 𝑤ℎ𝑒𝑟𝑒, 𝜀𝑡 ~ 𝑖𝑖𝑑 0, ℎ𝑡
log ℎ𝑡 = 𝜔 + 𝑎𝜀𝑡
2
+ 𝑏log ℎ𝑡−1
Regression 2
𝑦𝑡= 𝜙𝑦𝑡−1 + 𝛿1𝑥1𝑡 + 𝛿2𝑥2𝑡 + 𝜀𝑡, ∀ 𝑡 = 1, 2, 3 … 𝑁 𝑤ℎ𝑒𝑟𝑒, 𝜀𝑡 ~ 𝑁 0, ℎ𝑡
log ℎ𝑡 = 𝜔 + 𝛼 𝜂𝑡−1 + 𝛾𝜂𝑡−1 + 𝛽log ℎ𝑡−1 + 𝜆1𝑥1𝑡 + 𝜆2 𝑥2𝑡, 𝑤ℎ𝑒𝑟𝑒, 𝜂𝑡 =
𝜀𝑡
ℎ𝑡
, 𝜂𝑡 ~ 𝑖𝑖𝑑 0, 𝜔
• 𝑦𝑡 – return series for
• ℎ𝑡 – estimated variance
• 𝑥1𝑡 and 𝑥2𝑡 - are standardized residuals from regression 1.
• a, b, 𝛼, 𝛽, 𝛾, 𝛿, 𝜂, 𝜆, 𝜙 and 𝜔 - Parameters to be estimated.

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EMPIRICAL RESULTS
Details Variables JSE All Share
Index
USD–ZAR
Exchange Rate
Implied BTC
Exchange Rate
𝒙𝒕
Series' own lag 0.0109 -0.0193 -0.2548
(0.6352) (0.3945) (0.0009***)
JSE All Share Index -0.0017 -0.0001
(0.0009***) 0.3943
USD/ZAR Exch Rate -0.0014 0.0008
(0.0000***) (0.0009***)
Implied BTC Exch Rate 0.0001 0.0007
(0.8870) (0.0009***)
Parameters
𝜔 -0.2728 -0.2831 -0.3558
(0.0000***) (0.0000***) (0.0009***)
𝛼 0.0097 0.0028 0.0137
(0.0005***) (0.0000***) (0.0009***)
𝛾 -0.1260 0.0379 0.0084
(0.0000***) (0.0000***) (0.5209)
𝛽 0.9756 0.9791 0.9830
(0.0000***) (0.0000***) (0.0009***)
𝒙𝒕
JSE All Share Index -0.0213 0.0040
(0.0420**) (0.6981)
USD–ZAR Exch Rate 0.0637 0.0120
(0.0000***) (0.3956)
Implied BTC Exch Rate -0.0077 0.0194
(0.5723) (0.1077)
Stability 𝛽 + 𝛼 < 1 Yes Yes Yes
Asymmetry 𝛾 ≠ 0 Yes Yes No
Leverage 𝛾 < 0, 𝑎𝑛𝑑 𝛾 < 𝛼 < −𝛾 Yes No No

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RESULTS - Summary
Table III. Summary of mean and volatility shocks for:
Bitcoin, JSE stock, and USD/ZAR
No. Details Mean Variance
1 Bitcoin vs JSE Stocks None None
2 Bitcoin vs USD/ZAR Bidirectional None
3 Stock vs USD/ZAR Bidirectional Bidirectional

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FINDINGS - SUMMARY
Bitcoin and South African Financial Markets – who shocking who?
Financial shock dynamics ….
BTC/USD
Exch Rate
JSE
Stocks
USD/ZAR
Exch Rate
Mean eq. - Bidirectional
Variance eq. - Bidirectional

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CONCLUSION AND APPLICATION
❑ The findings the study show that:
o Bitcoin is independent of the JSE stock market
o Bitcoin has bidirectional shock transmission with USD/ZAR in the mean
return, but not variance.
o the domestic financial markets (JSE equity and USD/ZAR) have bidirectional
shock transmission in the mean and variance equations.
❑ These results should be informative to:
o Local and global investors who explore alternative products or diversification
o Monetary policy makers
o Financial markets regulatory system
❑ Further research may expand asset domain and upgrade the model, accordingly

16. Thank you