An analysis of the correlation between Bitcoin and the financial markets

Abstract

The aim of this dissertation is to determine the impact of the macro economic implications of the financial markets on the price of Bitcoin, in order to further-determine whether a positive or negative correlation is witnessed between the financial markets of Bitcoin. The macroeconomic implication of the financial markets under this study includes: CNY/USD, EUR/USD, S&P 500 index, Eurostoxx 50 index, Capitalization Weighted Stock Market Index, MSCI Emerging Markets Index, Gold, Number of transactions, Google Trends of Bitcoin. A linear regression model is used covering a period from 2012 up until 2017, which is then split into another two sub-samples. In addition to the regression analysis, an event study was implemented for this research looking mainly into two aspects. Aspect one being the effect of the Financial Market news on Bitcoin and aspect two being the effect of Bitcoin news on the financial Market.

Results obtained from the study suggest that the variables chosen are not the only determinants of the Price of Bitcoin with CNY/USD, S&P 500, number of Bitcoin transactions and Google Trends of Bitcoin being the only significant variable in the case of the full period. The two sub-periods show how the relationship of Bitcoin with the financial markets changed over time. In period one, only CNY/USD, number of Bitcoin transactions and Google Trends of Bitcoin showed significant result towards Bitcoin, while in the second period the only two significant variables are S&P 500 and Google Trends of Bitcoin.

Moreover, from the findings of the events study, it was gathered that normally the events of Bitcoin do not affect the financial markets, whereas the news of the financial market leaves a significant effect on Bitcoin. Overall the results obtained pointed towards a lack of consistency, since from the event study one is certain that only the news of the financial markets can affect Bitcoin. On the other hand, from the regression it shows that Bitcoin is a relatively new concept in the market and that it does not have a valuation behind, this makes it more subject to change the relationship with the financial market over time.