Bitcoin Investments: A New Bubble or a New Gold Mine Background
Investment has been a key driver of all world economies. Investors make decisions on what to invest in based on how viable investment avenue appeal to them. Investment in the digitalized cryptocurrency has been a key agenda for most investors. Bitcoin is a cryptocurrency form means which uses cartography as its security feature (Whelan, 2013). The term “bitcoin” was first been introduced by Satoshi Nakamoto in January 2009 and was used as a peer to peer means of payment. The network of payment was not however adopted by many people and has only come to catch the attention of most investors almost ten years down the line. The form is organic in nature and is not controlled by any central monetary body is not subject to manipulation by governments (Whelan, 2013). However, it does face some challenges in its operations. In this research, I will be using governmental and financial publications to try to answer if bitcoins are a good investment and worth the time or if this is just a bubble and it’s about to burst.
The term “Bitcoin” has first been introduced by Satoshi Nakamoto in January 2009
Problem Statement Investments in the use of Bitcoins is very efficient and safe due to the mechanisms used to support the system. The use of the system is also very swift and leads to more yields than other investment mechanisms used. The system has also been known to be useful in communication and in the transfer of information since it enhances anonymity (Coindesk, 2015). The crypto-currency form should, therefore, be enhanced by its operating to make it more applicable and available to all range of investors. Many people have made tremendous amounts of money from the use of the bitcoins. Complains from the usage of the system have emerged but have been very minimal compared to the success stories and evidence put forward by the cryptocurrency operators (Coindesk, 2015). The system has at some point been hacked and criminals gained access to the digital wallets hence leading to loss of money. The operating system of the bitcoins should, therefore, be optimized in terms of volatility and for security reasons so that it can wholly be adopted for investment purposes. Purpose of the Study This study will use governmental and financial publications as well as mathematical derivations to determine if bitcoins are a good investment and worth the time or if this is just a bubble and it’s about to burst. The main aim of the study will be the investment viability of the bitcoins in relation to another form of money systems.
I. Is investment by use of bitcoins secure?
II. Is the trade in bitcoins overregulated?
III. Is the trade in bitcoins a mere speculation or a viable form of investment?
IV. How do interest rates affect the market return on bitcoins?
I. Investments in the use of Bitcoins is the most secure form since bitcoin address is generated at the end of every transaction
II. Investors are more comfortable when trading in Bitcoins since external bodies such as governments, financial intermediaries have no control over bitcoins accounts hence investors activities are not affected.
III. The only most prominent factor that affects the usage of bitcoins is their volatility and hence trading in Bitcoins is real and not mere speculation.
IV. Interest rates are the major driver of the Bitcoin market return. Methodology for the Study The study will adopt different models that will aid in the investigation of the viability of the bitcoin market. The models will use mathematical derivations to assess the relationships between the bitcoins, gold and the dollar (Hammoudeh &Yuan, 2008). The first model will be the Garch model which will make use of different variables to determine mean and the variance of the bitcoin in relation to the federal funds rate ( Fedt-1), the United States $-Euro exchange rate ($-Eurot-1), the British pound- US$ rates (US$-GBPt-1), the financial times stock exchange (FTSE) index, the gold futures rate (GFt-1), Gold cash rate (GCt-1) and the bitcoin prices rate (P) (Hammoudeh &Yuan, 2008).
Meanchange in lnPt =ОІ0+ОІ1 lnpricet-1+ОІ2 lnpricet-2 + ОІ3 Fed t-1+ОІ4 $-Euro t-1 +ОІ5 $-Euro +ОІ6FTSE t-1+ ОІ7 GF+ОІ t-1 +ОІ8GC t-1+ОµtMedianПѓ2t =exp(О»0+О»1Fedtв€’1+О»2 $-Eurotв€’1+О»3$-GBPtв€’1+О»4FTSEtв€’1+О»5GFtв€’1+О»6GCtв€’1)+О±Оµ2tв€’1+ОІПѓ2tв€’1 The other model will be Garch( Exponential) model
The model attempts to investigate the effect on the returns of bitcoins by the leverage effect (good or bad news) by the use of variance and mean (Hammoudeh &Yuan, 2008).
MeanChange in lnprice t =ОІ0 +ОІ1 lnpricetв€’1+ОІ2 Fedtв€’1+ОІ3 $-Eurotв€’1+ОІ4 $-GBPtв€’1+ОІ5 FTSEtв€’1+ОІ6 GoldFut uretв€’1+ОІ7 GoldCashtв€’1+ОµtMedianLn(Пѓ2t) = О»0+О»1Fedtв€’1+О»2 $- Eurotв€’1+О»3 $-GBPtв€’1+О»4FTSEtв€’1+О»5GFtв€’1+О»6GCtв€’1+О±(Оµtв€’1/Пѓtв€’1)+Оі(|Оµtв€’1/Пѓtв€’1|в€’ в€љ2/П’)+Оґln(Пѓ2tв€’1)
From the variance equation, there seems to be a low rate of convergence to a long run equilibrium. There is evidence of clustering of the volatility as well a higher rate of persistence due to volatility like that of gold. Therefore, the demand for bitcoins highly affects their returns and also less affected by the temporal shocks caused by changes in prices showing more similarity of bitcoins to currency. Interest rates are thereby the major factors that affect returns of an investment using bitcoins (Tully & Lucey, 2007). The volatility is seen to be positive with all the variables but with the exchange rate between the dollar and the Euro. From the Garch (Exponential model), the leverage effect has no asymmetry on the return of the bitcoins and to the returns and hence one can use bitcoins to hedge market risks. From the foregoing, bitcoins then acts like more of a currency (Tully & Lucey, 2007). Literature Review[bookmark: _GoBack]Tully & Lucey (2007) states that the variance of the bitcoins is usually externally determined and not by internal factors like gold prices since it is mostly affected by forces of the market and also due to its high intrinsic values.
The risk inherent in the management of bitcoins highly depends on the previous volatility levels of the bitcoin and the dollar (Coindesk, 2015). Gold was much more affected by the demand for jewelry since it’s it’s a metal and not an industrial item hence influenced by shocks that are shortlived (Hammoudeh &Yuan, 2008)Tully & Lucey (2007), states that bitcoins could be useful in hedging against the dollar.
Coindesk(2015). Bitcoinpriceindex URL:http://www.coindesk.com/price/bitcoin-price-index/Accessed May 2015.
Whelan,K.(2013) Howis bitcoin different from the dollar?Forbes.URL:http://www.forbes.com/sites/karlwhelan/2013/11/19/how-is-bitcoin-different-from-the-dollar