The linkage between Bitcoin and foreign exchanges in developed and emerging markets

Area of Science:

• Financial Econometrics
• Cryptocurrency Markets
• International Finance

Background:

• Understanding the interconnectedness of Bitcoin and fiat currencies is crucial for financial stability.
• Existing models may not fully capture the complex dependencies between cryptocurrencies and traditional markets.
• The increasing volatility of Bitcoin necessitates robust analytical frameworks.

Purpose of the Study:

• To investigate the connectedness between Bitcoin and fiat currencies in developed (G7) and emerging (BRICS) economies.
• To compare the efficacy of the regular (R)-vine copula with benchmark models (multivariate t-copula, DCC-GARCH).
• To analyze the impact of significant market events on this linkage.

Main Methods:

• Utilized the regular (R)-vine copula methodology.
• Benchmarked against the multivariate t-copula and dynamic conditional correlation (DCC) GARCH models.
• Examined data encompassing Bitcoin price movements and major global events.

Main Results:

• The R-vine copula model demonstrated superior performance in capturing dependencies compared to benchmark models for both G7 and BRICS currency baskets.
• The study identified increased cross-market linkages during Bitcoin crashes, particularly significant during the 2021 and 2022 crises.
• Shock transmission paths are better modeled by the R-vine copula, offering richer insights into market dynamics.

Conclusions:

• The R-vine copula provides a more accurate representation of Bitcoin's connectedness with fiat currencies.
• Significant market events demonstrably influence the linkage between Bitcoin and traditional currencies.
• The findings suggest a potential end to Bitcoin's market isolation, indicating increased integration with global financial systems.