Monetary variables and Bitcoin price

For many analysts, the most important financial innovation after the 2008 financial crisis was cryptocurrencies. Cryptocurrencies are used as a payment method and represent an alternative investment with diversification advantages. Cryptocurrencies were also born in response to the obstacles encountered by current payment systems that rely heavily on third parties such as companies that issue payment services that are believed to manage digital transactions such as Visa, Master card and Paypal. Bitcoin is widely used around the world. It is not issued by a sovereign government but mined from users. Many traders see bitcoin as an investment, which is why they buy it on dedicated exchanges. Its price started to rise in 2013, reaching peaks in 2018.

Bitcoin is a decentralized currency, as it is not issued by any central bank. Therefore, it has no legal protection. It is not fiat money. In case of fraud, no government will refund the lost bitcoins. This means that the risk is higher than that of fiat currencies. However, bitcoin has several advantages, such as low inflation risk. Furthermore, it is not related to the real economy. Fiat currencies lose purchasing power and depreciate as central banks continue to print new money. The unconventional monetary policies adopted by central banks over the last years devalue domestic currencies, since the money supply is inflated. Instead, the bitcoin supply is limited to 21 million coins, no more. Risks for price stability are not there.

By understanding the factors that influence the bitcoin price, traders can predict long and short term effects. On the one hand, bitcoin has made interesting progress with its price hike, but on the other it is an illegal currency. Will it become legal or just one of many investment products? On this question experts are divided. Previous studies, e.g. Wu, Pandey and Dba (2014), mentioned the role of bitcoin as money and its efficiency as an investment asset. They concluded that it is less useful as money, but it can play an important role in improving the efficiency of a trader’s portfolio. Research conducted by Bergstra & Weijland (2014) concluded that bitcoin is a money-like information product. Jia (2013) concluded that it has its main function as money, but it is not yet real money. Das & Kannadhasan (2018) argued that it is isolated from global factors in the short term. Sukamulja and Sikora (2018) observed that the macroeconomic indicator shown by the Dow Jones Industrial Average has a significant negative influence in the long and in the short run. Sovbetov (2018) has shown that factors related to cryptomarket such as market beta, trading volume and volatility seem to be a determining factor for cryptocurrencies, both in the short and long term. Phillips & Gorse (2018) concluded that the positive medium-term correlation between online factors and bitcoin price strengthens significantly during regimes similar to a price bubble; this explains why these relationships have previously been seen to appear and disappear over time.

Citra Anggun Kusumastuty, Dwi Wulandari, Bagus Shandy Narmaditya, Mahirah Kamaludin of Universitas Negeri Malang, Indonesia, in their study “Monetary variables influence the price of the cryptocurrency? Lesson from Indonesia”, provide an understanding of the effect of monetary variables on the price of cryptocurrencies. The authors believe that their results are important because it emerges that “Bitcoin is a single currency, because it has no relationship with the government or with any party, it adopts a decentralized system, which means that everyone can manage it, and this is unique because there is a limit to the supply, which is 21 million. But this is also a potential future problem. The historical price of bitcoin has become the biggest influence on the price of bitcoin itself. Some people who buy bitcoin always have in mind its historic record high, which tends to increase every year, and therefore they want to buy because they think it has a bright future, which means it also increases demand and users”.

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