Dynamics of Foreign Exchange Rates and Bitcoin Trading Prices

Abstract

The study examined the volatility of Bitcoin prices and volatility of exchange rates of oil-producing countries. The study used ARIMA, GARCH estimators for analysis. The study found ARCH effects in the data (heterskedasticity test; p<.05). The GARCH results laid credence to a confirmation of adjustments in the Bitcoin market having significant volatility influence on local currencies. Persistent volatility and volatility clustering found in some of the sampled countries denote increased risk and uncertainty in foreign exchange markets that stimulates increased borrowing costs and reduced liquidity.  The actual and forecast values based on the ARIMA method match with an Out-of-Sample period plotted for forecast (27/12/2022 to 27/12/2024) except for Nigeria. The ARIMA models for UAE and Kuwait stand out with excellent fit and prediction accuracy. The poor ARIMA model for Nigeria was ascribed to the hyper-inflation in the economy and extremely volatile money market. In line with the efficient market hypothesis, significant interactions are pegged on available information being already reflected in the current value of the currencies. In effect, past currency rates and Bitcoin trading prices are useful predictors of future prices having factored in the relevant information that could influence currency's value. In addition, future values of local currencies can be forecasted from past values at a significant level of accuracy. Countries should ensure adequate regulation of the foreign exchange markets so as to curtail the wave of volatility risks on returns associated with Bitcoin trading and exchange rates.