Co-Integration and Causality between Macroeconomics Variables and Bitcoin

Abstract

The fintech sector has been booming for the past decade, especially with the unprecedented expansion in cryptocurrency innovation. Many countries and their central banks are working to accommodate cryptocurrency in a regulated format into their financial system anywise. This research paper investigates the long-run and short-run relationship between Bitcoin (INR) and the macroeconomic variables of the Indian economy, such as two major stock indices (NSE and BSE), money supply M1, foreign exchange rate (INR/US dollar), and indicators of inflation rate (CPI and WPI). For this purpose, monthly data of the variables from October 2014 to December 2020 are considered. The Johansen co-integration approach depicts the long-run association between Bitcoin and the economic variables, whilst VECM and the Wald coefficient reveal no short-run causality between the variables. The Granger Causality test shows a one-way causal relationship of NSE, BSE and WPI to Bitcoin. Hence, it concluded that stock indices and inflation have a cogent effect and exert on bitcoin prices. The findings will be helpful for policy-makers and investors alike, for an outlook to strategize and explore this everchanging digital instrument.