REVISTA CHAKIÑAN, 2018, Nº.5, AGOSTO, (54-72)

ISSN 2550-6722

BITCOIN: ITS INFLUENCE ON THE GLOBAL WORLD AND

ITS RELATIONSHIP WITH THE STOCK EXCHANGE

BITCOIN: SU INFLUENCIA EN EL MUNDO GLOBAL

Y SU RELACIÓN CON EL MERCADO DE VALORES

ABSTRACT

RESUMEN

The new technological advances have brought a revolution on how economic agents interact

with society and markets. Nowadays, the use of virtual currencies is more frequent in the nan-

cial transactions and bitcoin has been dened as the most important world cryptocurrency due

to its high market capitalization and its technological infrastructure. Several studies have been

conducted to discuss bitcoin advantages and disadvantages; however, few papers in literature

have examined its connection and inuence on the stock market. The objective of this paper

is precisely cover this gap. Firstly, by providing tools and concepts to understand bitcoin’s

dynamic, and then determining its relationship with stock market indexes. In that context, this

manuscript examines the denition and function of bitcoin in the global world and its presence

in Ecuador. Besides, exploratory and visual analyses are provided using the evolution of bitcoin

and other market indexes. Finally, a linear correlation is computed between bitcoin, other cryp-

tocurrencies, stock exchange indexes and commodities. The results in this study, employing

visual and statistical analyses, demonstrated that bitcoin has: a strong relationship with other

cryptocurrencies; a lineal correlation, not as strong as the previous one, with the main stock

market indexes; and no linear correlation with commodities.

Keywords: bitcoin; commodities; cryptocurrencies; linear correlation; stock exchange indexes.

Los nuevos avances tecnológicos han traído consigo una revolución en cómo los agentes eco-

nómicos interactúan con la sociedad y los mercados. Actualmente, el uso de monedas virtuales

es frecuente en las transacciones nancieras y el bitcoin ha sido denido como la criptomoneda

más importante a nivel mundial debido a su alta capitalización en el mercado y a su infraes-

tructura tecnológica. Varios estudios han sido realizados para discutir las ventajas y desven-

tajas del uso del bitcoin; sin embargo, pocos estudios han examinado su conexión e inuencia

en el mercado de valores. El objetivo de esta investigación es precisamente cubrir este nicho.

Primero, proveyendo herramientas y conceptos para entender la dinámica del bitcoin y luego

determinando su relación con el mercado bursátil. En este sentido, este manuscrito analiza la

denición y rol del bitcoin en el mundo, así como su presencia en Ecuador. Además, se provee

un análisis exploratorio y visual de la evolución del bitcoin y de los índices del mercado de

valores. Finalmente, una correlación lineal es calculada entre el bitcoin, otras criptomonedas,

índices bursátiles y materas primas. Los resultados del estudio, empleando técnicas visuales y

estadísticas, demuestran que el bitcoin tiene: una fuerte relación con otras criptomonedas; una

correlación lineal, no tan fuerte como la anterior, con los principales índices bursátiles; y no

tiene una correlación lineal con las materias primas.

Palabras clave: bitcoin; correlación lineal; criptomonedas; índices bursátiles; materias pri-

mas.

Alexandra Piedad Cortez Ordoñez

Ana Belén Tulcanaza Prieto

alexandra.cortez@upc.edu

ana_b_tulcanaza@kumoh.ac.kr

Universidad Politécnica de Cataluña, España

Kumoh National Institute of Technology (KIT),

Corea del Sur

Fecha recepción: 08/03/2018

Fecha aceptación: 09/05/2018

REVISTA CHAKIÑAN, 2018, Nº.5, AGOSTO, (54-72)

ISSN 2550-6722

INTRODUCTION

“Bitcoin is a groundbreaking digital techno-

logy with the potential to radically change

the way we conduct banking and commer-

ce and to bring billions of people from the

emerging markets into a modern, integrated,

digitized, globalized economy” (Vigna and

Casey 2015:4).

Recent advances in technology have chan-

ged the world and the way how the econo-

mic agents interact with each other. A clear

example of this phenomenon is the different

way to make transactions using new tech-

nologies. Nowadays, a considerable part of

dealings, purchases, and payments are made

through the Internet and concepts such as

virtual money, electronic commerce “e-com-

merce”, and electronic business “e-business”

are becoming more familiar. Smithin (2002)

point out citizens are turning into a “cashless

society”, however it does not imply society

is transforming into a “moneyless communi-

ty”. Actually, money is still the main part in

all nancial transactions; however, the num-

ber of agents using virtual money is increa-

sing. Hileman and Rauchs indicates “the ac-

tive users of cryptocurrency are predicted to

be between 2.9 million and 5.8 million, and

at least 1,876 people are working full-time in

the cryptocurrency industry” (Hileman and

Rauchs 2017:8).

The concept of money has not been always

related to the perception of currency; it de-

pends on social customs and needs (Malo-

ne 2014). Traditionally, money is described

as an element generally accepted as pay-

ment for goods, services or debt settlement,

whose main functions are to be a medium

of exchange, a unit of account and a reser-

ve of value. Money must be guaranteed or

certied by the issuing entity. Governments

through laws and other entities, such as cen-

tral banks, regulate and control the monetary

policy. Several authors and economic agents

dene bitcoin as money; however, this des-

cription may be inconsistent considering the

money’s accurate denition. Then, what is

bitcoin?

“Bitcoin is the rst decentralized digital cu-

rrency” (Brito and Castillo 2013:1). It was

introduced in the nancial market by an unk-

nown person or group of people using the

alias Satoshi Nakamoto in 2009. This new

virtual currency does not depend on a coun-

try regulation because its use is anonymous,

and it allows cheap and easy international

payments employing a virtual bank account

called “digital wallet”, which is located in

the cloud or on a client´s computer. Brito

and Castillo (2013) conceptualize bitcoin

as a peer-to-peer mechanism between users,

without an intermediary.

People can buy bitcoins as an investment in

the bitcoin exchanges market, they can use

any currency in these transactions. In addi-

tion, they can send bitcoins to other users

through mobile applications or their compu-

ters, this process can be considered as “sen-

ding digital cash” where the names of buyers

and sellers are never revealed, only their wa-

llet IDs are displayed.

Bitcoin is not only a virtual currency but also

a discovery of technological infrastructure

that involves blockchain computing, which

has a similar effect as the Internet in tradi-

tional computer networks. Blockchain com-

puting is unique due to copies of the entire

system can be maintained simultaneously on

millions of computers located anywhere.

The most important characteristics of bit-

coin are:

(1) Decentralized: it does not depend on

any governmental authority, and it involves

mining and transaction verication by ne-

tworks.

(2) Anonymous: the bitcoin wallet is not

associated with any personally identiable

information. Nevertheless, authorities could

associate the anonymity of bitcoin transac-

tions with drug trafcking, terrorism, and

other illegal and dangerous activities.

(3) Transparent: the blockchain (digita-

lized, decentralized and public ledger) saves

all bitcoin transactions, however tracking a

particular bitcoin address to a person is still

almost impossible.

(4) Fast: the bitcoin network processes

payments instantaneously, it normally takes

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ISSN 2550-6722

just a few minutes for users to receive mo-

ney.

(5) Non-repudiable: clients do not reco-

ver bitcoin transactions; it ensures the recep-

tion of payment.

The unit of account of the bitcoin system is

bitcoin and the ticker symbols used to repre-

sent it are BTC and XBT (The popular tic-

ker name ‘BTC’ violates ISO 4217 because

it conicts with Bhutan’s currency which is

BTN [Bhutanese Ngultrum]. For that reason,

some people use the alternative ticker name

“XBT” which is not ofcial). The long-term

fundamental value of bitcoin is not statisti-

cally different from zero, and its market was

estimated to be around - 3.3 billion of Uni-

ted State Dollars (USD) during 2015 (Cheah

and Fry , 2015). In addition, the bitcoin capi-

talization (using the current market prices of

2017) is around USD 67.8 billion. Most the

researches agree that bitcoin prices incorpo-

rate a reasonable speculative component and

their markets are directly affected by nan-

cial bubbles.

Authors summarize the advantages of bit-

coin as (1) high portability, which means

that it is easy to transport and employ be-

cause users only need Internet access to send

and receive money using quick response

code (QR-code) or online wallet, (2) volun-

tary commission fee, users can choose cost

and the waiting time to send and receive

transactions, (3) no Payment Card Industry

(PCI), which implies lower commissions

and administrative expenses for clients, (4)

security and control through monetary pro-

tection using backup copies and encryption,

also personal information is always saved,

(5) transparent, predictable and neutral tran-

sactions, and (6) it cannot be counterfeited

because it uses blockchain technology and

algorithms.

Conversely, the disadvantages of bitcoin are:

(1) legal status, which varies drastically from

one country to another, (2) lower level of re-

cognition than traditional currencies, (3) lost

key which means that users have a unique

alphanumeric password to access to bitcoin

wallet, (4) volatility in the bitcoin price that

does not allow to predict its value due to its

rapid and drastic changes for several cycles

of skyrocketing and plummeting referred to

bubbles and busts, and (5) its continuous de-

velopment is not clear because governments

and banks are not able to control bitcoins.

The bitcoin price formation could be explai-

ned through the traditional determinants of

currency price such as the market forces of

supply and demand of this cryptocurrency.

Nevertheless, its price also depends on mul-

titude factors such as the number and size

of business that accept bitcoin as payment,

and the tendency of present and future spe-

culation. Furthermore, the specic exchange

rates are formed in the process of bitcoin tra-

ding on various online exchanges. Whiting

this context, new methods as time-series

analyses are implemented to explain the bit-

coin price per the bitcoin allure for investors

and users (Ciaian, Rajcaniova and Kancs

2016).

In summary, the importance of bitcoin is

related to the improvement in domestic

payments and the rapid development of al-

ternative forms of international transfers.

Recently, it seems that bitcoin has assumed

the role of investment assets based on its

price appreciation, which is not the result of

ination because it is scared and easily inter-

changeable. On the other hand, according to

some sources, bitcoin is considered a good

vehicle for money laundering and terrorism

nancing.

In this context, the general objective of this

article is to understand the importance and

the inuence of bitcoin in the global world

and its relationship with other market in-

dexes. The specic objectives aim to: (1)

investigate previous academic works deve-

loped in this eld, (2) analyze the evolution

of bitcoin and examine important events that

determine its volatility, (3) explore the cryp-

tocurrency market in Ecuador, and (4) test

if bitcoin has a linear correlation with other

cryptocurrencies, stock exchange indexes

and commodities, employing visual and sta-

tistical analysis.

The document is composed of three sections.

The rst part describes the methodology of

this study. The second section, correspon-

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RESULTS AND DISCUSSION

METHODOLOGY

ding to the results and discussion, is divided

into four subsections: (1) the background

review that refers to the bitcoin’s theoreti-

cal, (2) an empirical analysis of bitcoin, its

evolution, its participation in the Ecuadorian

economy, (3) a comparison between bitcoin,

other cryptocurrencies, stock exchange in-

dexes, and commodities, (4) an explanation

of the hypothesis, the linear correlation com-

putation and the obtained results. Finally, the

last section of this paper covers conclusions

and recommendations for future work.

This article follows a mixed methodology.

The term “mixed” refers to a novel methodo-

logy of research, popular in social sciences,

which allows the systematic integration or

“mixing” of both, qualitative and quantita-

tive analysis. This procedure permits a com-

plete study than do a separate analysis. Me-

thodologist John Creswell classies mixed

methodology in six strategies: (1) Sequential

Explanatory, (2) Sequential Exploratory, (3)

Sequential Transformative, (4) Concurrent

Triangulation, (5) Concurrent Nested, and

(6) Concurrent Transformative. The charac-

teristics of each strategy dene their purpose

and their accurate application. In this paper,

a Sequential Exploratory methodology will

be used. It begins with an initial phase of

qualitative analysis followed by a quantita-

tive research, in order to explore a phenome-

non and test a new instrument.

In that context, a descriptive analysis of the

main investigations in this area is made,

which allows verifying the lack of correla-

tion analysis that is proposed in the objecti-

ves of this study. Then, with the purpose of

understanding bitcoin dynamic, a summary

of its evolution and the principal events that

have caused its volatility is done. Additio-

nally, to test its relevance, a research of bit-

coin’s inuence in Ecuadorian markets is

performed, and later on a description of the

evolution of bitcoin, main stock exchanges

indexes, other cryptocurrencies, and com-

modities. The quantitative analysis has been

made to help achieve the proposed objecti-

ves. A linear correlation calculation is a tool

proposed to verify the hypotheses.

Finally, based on these qualitative and quan-

titative results, the principal conclusions and

recommendations are established.

In this section, a qualitative and quantitative

analysis is performed. Following the metho-

dology described, the study begins at a qua-

litative level. First, a descriptive analysis of

the main studies on this subject so far is in-

troduced. Then, an empirical study is done,

divided into three parts: (1) the bitcoin´s clo-

se price is evaluated to denote its volatility

during the analyzed period, (2) the Ecuado-

rian experience with cryptocurrencies and

bitcoin is schematized to corroborate the

actual situation of virtual currencies in this

country and (3) the evolution of bitcoin and

the most important markets (global cryp-

tocurrencies, stock exchange indexes, and

commodities) is done to investigate their

trend. Finally, the bitcoin phenomenon is

explained at a statistical level and a linear

correlation calculation is used to verify the

proposed hypotheses.

Theoretical framework

The theoretical framework in this manuscript

reviews the most important bitcoin studies to

dene the main characteristics of this virtual

currency, its advantages and disadvantages,

and its volatility using previous studies.

The evaluation of this new monetary and

electronic system that arises independent-

ly without any government control was

analyzed by Durgun and Timur (2015). They

discovered cryptocurrencies offer the same

monetary services as traditional money and

have been able to nd users in the market.

Dibrova (2016) conrmed this statement,

her investigation on bitcoin’s price dyna-

mics evidenced that virtual currency market

has a vast potential for development. Anto-

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ISSN 2550-6722

nopoulos (2016) examined in his book how

the internet transforms the society allowing

people around the world interact easily. The

author explained the importance of bitcoin

to transform the traditional nance and to

bring nancial independence to worldwide.

The economic aspect of bitcoin was focused

in Kubát (2015) research, demonstrating that

bitcoin cannot easily be considered as mo-

ney after analyzing the theoretical, empiri-

cal and legal denition of money in Czech,

German and American laws. Later on, Bri-

to, Hoegner, Friedman, Rae and Osborne

(2015) also arrived at the same conclusion

based on the study of cryptocurrency law in

Canada, Germany, the United Kingdom and

the United States. Gimigliano (2016), pro-

vided an analysis of the European Union’s

jurisdiction for bitcoin and e-payments, the

user funds protection, the stability of pay-

ment system and the competitiveness of EU

market.

In addition, the end-users’ motivations and

barriers employing bitcoin as a digital cu-

rrency were studied by Presthus and O’Ma-

lley (2017). They conducted a small sur-

vey with 135 participants and conrmed

that approximately 13% adopt bitcoin due

to their technological curiosity and not for

monetary incentives or external inuences.

Furthermore, people in the non-user group

are waiting for the results of benets and se-

curity issues to start using bitcoin.

The concerns of the legislative authorities on

money laundering and illegal nancing acti-

vities were studied by Dibrova (2016). The

same awareness was shared by Blau (2018).

In his work, he explained the use of bitcoin

as an exchange medium and the possibili-

ty of using it to nance criminal activities

due to its speculative nature. In spite of the-

se concerns, little evidence has directly im-

plicated crypto-coins in money laundering,

even when cryptocurrencies resemble a con-

ventional form of money as a medium of ex-

change. Campbell-Verduyn (2018) analyzed

the effectiveness of the global anti-money

laundering regime and concluded that natio-

nal currencies and other digital technologies

perform equal or greater money laundering

challenges, and it is necessary to concentrate

efforts to combat this illegal practice inde-

pendently if it is a conventional or virtual

currency.

The volatility of bitcoin is another point of

interest for researches. The reasons for bit-

coin´s price dynamics were studied by Blau

(2018). He concluded that during 2013, spe-

culative trading did not contribute to the

unprecedented rise and subsequent collapse

in the value of bitcoin and it was not asso-

ciated with its unusual level of volatility. In

addition, Kubát (2015) showed in his inves-

tigation that the bitcoin’s volatility is signi-

cantly higher than other currencies and as-

sets. Nevertheless, Durgun and Timur (2015)

explained that virtual money has a limited

impact on markets due to its insufcient in-

frastructure, legal gaps, prohibitions, weak-

ness and insecurity of Internet networks.

On the other hand, Yermack (2015) afrmed

that bitcoin is a speculative investment and

it has achieved a minimum volume of con-

sumer transactions due to its short-term risk

and its high volatility. The author established

the virtual zero correlation between the daily

bitcoin exchange rate, the used currencies,

and gold. Furthermore, bitcoin does not have

a deposit insurance and it could not access

the banking system that increases hacking

activities.

Authors as Yelowitz and Wilson (2015)

agree with Yerman’s study. They used Goo-

gle Trends dataset to analyze the searches of

bitcoin users, and they concluded that search

terms as computer programming and illegal

activity are certainly correlated with bitcoin

interest, while libertarian and investment

terms are not associated with this new type

of money.

The volatility studies of bitcoin go beyond

qualitative analysis. Several quantitative

types of research have also been developed.

For instance, Dyhrberg (2016) introduced

the nancial asset capabilities of bitcoin

using comparative GARCH models between

this virtual currency, gold, and American

dollar. Her ndings of hedging capacity and

medium of exchange, demonstrated simila-

rities between gold and dollar, while bitcoin

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ISSN 2550-6722

is preferred by risk-averse investors for ade-

quate risk management in portfolios and -

nancial markets.

The portfolio diversication with bitcoin

was studied by Brière, Oosterlinck and Sza-

farz (2015). The authors used a portfolio that

incorporates: (1) traditional assets (stocks,

bonds, and hard currencies) and (2) alterna-

tive investments (commodities, hedge funds,

and real estate). They demonstrated that the

admission of a small proportion of bitcoins

increased the risk-return rate in both alterna-

tives in the short term. However, the span-

ning tests did not corroborate the results in

the medium and long term.

The interdependencies of prices between

bitcoin and altcoin markets in the short and

long term were analyzed by Ciaian et al.

(2018). The authors used time series analysis

and daily data of 17 virtual currencies, inclu-

ding bitcoin, and two altcoin price indexes

for the 2013-2016 period, to conrm that the

BitCoin-altcoin price relationship was signi-

cantly stronger in the short-run than in the

long-run. Their results also showed a bitcoin

impact in the short-term for some altcoins

that are similar to the bitcoin price forma-

tion.

The review of previous studies reveals the

lack of research works about the linear co-

rrelation of bitcoin and other stock market

indexes, similar to the one proposed in this

manuscript.

Bitcoin’s close price evolution

Bitcoin has had a very volatile trading his-

tory since its inception in 2009. Initially,

it traded for almost nothing (around USD

0.0008). In July 2010, bitcoin had its rst

real price increase, a single coin for USD

0.08. With two years in the nancial market,

on February 9th 2011, bitcoin achieved pari-

ty with the American dollar, causing interest

in investors in some markets. Its value grew

rapidly exceeding USD 10 over the next two

years. The condence in this cryptocurrency

was increasing as its value, on March 11th

2013, the close price of bitcoin was similar

to USD 50 (47.41 to be exact). Although the

price dropped sharply and the Mt. Gox, one

of the world’s bitcoin exchanges, tempora-

rily suspended bitcoin deposits, the con-

dence and validity of some transactions in

the bitcoin market were not affected (Chain

Fork Information 2013).

On April 2013, its value exceeded USD

100 when The European Commission, the

European Central Bank and the Internatio-

nal Monetary Fund announced the rescue

of the Cypriot Economy under certain con-

ditions, such as a considerable tax on bank

accounts with holdings exceeding 100,000

euros (EUR), a policy that affect wealthy

people from Cyprus and abroad, due to the

reputation of this country as tax haven. As a

solution to preserve their holdings, many of

these account holders bought bitcoin in mas-

se (Bitcoin Price History 2018).

A signicant peak was reached on Novem-

ber 29th 2013. The bitcoin’s close price was

USD 1,101.38 due to the fast-growing bit-

coin investment in China. Mt. Gox was still

operating and was involved in approximate-

ly 70% of all transactions. The bitcoin price

began to be more volatile when the rst res-

trictions appeared. For instance, according

to Cable News Network -CNN- (2013), The

People’s Bank of China declared that bitcoin

is not a currency and prohibited to any insti-

tution to trade, insure or offer services related

to this cryptocurrency. People had problems

withdrawing their money from the exchange

and the bitcoin prices fell below USD 1,000.

Later on, the massive DDoS attacks (distri-

buted denial-of-service is an attack in which

multiple compromised computer systems

attack a target, such as a server, website or

another network resource, and cause a denial

of service for users of the targeted resour-

ce.) declined the bitcoin price in February

2014, from around USD 940 (February 1st)

to USD 111 (February 21st) (MtGox 2013).

During the rest of 2014 and 2015, the bitcoin

value remained with decreasing trends. Bit-

coin’s close price ranged from USD 600 to

around USD 300, despite the facts such as:

(1) the Internal Revenue Service (IRS) of the

Unites States (US) tried to classify bitcoin as

a property subject to capital gains taxes, (2)

more restrictions were established from The

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ISSN 2550-6722

People’s Bank of China, (3) the US gover-

nment increased regulations for companies

that interact with bitcoin, and (4) the bitcoin

was accepted as a medium of payment in

some big companies as Dell, Microsoft and

Braintree (Bitcoin Price History 2018).

In 2016, bitcoin showed a slow but steady

upward trend, its price exceeded USD 500

during the rst semester. The bitcoin com-

munity grew, and some inuential members

gathered in Hong Kong to discuss a plan for

scaling bitcoin. However, there was some

discouraging news such as the theft of custo-

mer funds for security breaches. On Novem-

ber 9th 2016, Donald Trump was elected as

the 45th President of the United States and

the reaction in the markets was immediate.

Most of the markets opened sharply lower

and investors rushed into known havens

such as gold. Bitcoin increased its price by

5% in just 24 hours with a close price of

USD 721.42 (Bitcoin Price History 2018).

The popularity of bitcoin increased quickly

due to the massive media coverage, attrac-

ting new users interested in this novel cryp-

tocurrency who bought bitcoin and pushed

its value to the top. On January 3rd 2017,

the bitcoin price broke USD 1,000 for the

rst time in three years. The price of USD

2,720.53 was reached on August 1st 2017,

after Japan recognized bitcoin as a legal

medium of payment and the bitcoin code

was divided into two parts to create a com-

peting cryptocurrency called bitcoin cash.

The holdings of bitcoin owners’ have dou-

bled thanks to this action. If someone had

10 bitcoins before August 1st, since this date

the owner had additionally 10 bitcoin cash

(CoinDesk 2017).

The price has grown rapidly since then, al-

though there is an increasing risk and authori-

ties tried to control this market. For instance,

Chinese authorities ordered Beijing-based

cryptocurrency exchanges to cease trading

and stop registering new users (Bitcoin Price

History 2018). However, the price exceeded

USD 5,000 for the rst time on October 11th

2017, USD 10,000 on November 28th 2017,

and USD 20,000 on December 18th 2017;

that is, it tripled its price in just two months,

reaching records never seen before and ex-

ceeding all predictions.

The price was affected after South Korea,

the third-largest cryptocurrency market in

the world, announced policies to regulate

the bitcoin trade, such as the closing of stock

REVISTA CHAKIÑAN, 2018, Nº.5, AGOSTO, (54-72)

ISSN 2550-6722

exchanges (Bitcoin Price History 2018).

Nevertheless, bitcoin continues to trans-

cend expectations and maintains a high, but

uctuating value. On February 28th 2018, it

closed at USD 10,334.44. The evolution of

the bitcoin´s close price is displayed in the

gure 1.

Digital currencies and bitcoin evolution in

Ecuador

Ecuador introduced bitcoin and other digital

currencies in July 2014 as a part of the re-

form of the country’s monetary and nancial

laws. However, the then-President Rafael

Correa ordered to stop the bitcoin operations

and conscate the circulation of bitcoins and

assets in this virtual currency.

The Central Bank of Ecuador (BCE) does not

recognize bitcoin as a medium of payment,

which is stipulated in the Monetary and Fi-

nancial Organic Code, article No. 94 (Asam-

blea Nacional del Ecuador 2014). None-

theless, in 2014, the BCE presented its own

digital currency, called Dinero Electrónico,

and it is pegged one-to-one to the US dollar

(the ofcial currency of Ecuador). This elec-

tronic currency is issued by the BCE and it is

not equal to cryptocurrency or bitcoins due

to it has backing in paper, metal and liquid

assets. Furthermore, the Ecuadorian govern-

ment promotes electronic money because the

useful life of dollars in Ecuador is 2.5 years,

while in the United States it is 7.8 years. The

BCE (2018) reported that citizens, who have

digital money in their virtual accounts, have

three options to manage it. First, this money

can be downloaded and effective. Second,

users can buy with it in places that accept

this virtual money as a medium of payment.

And third, it can be transferred to any nan-

cial institution as saving.

On April 16th 2018, all the electronic money

accounts in the BCE are going to be deacti-

vated due to the approval of the Law of Eco-

nomic Reactivation, which transfers the ad-

ministration of electronic money to private

banks. Actually, the challenges of the Ecua-

dorian public nancial sector are still large

and dened as a support to reduce the use

of physical money and offer new services

involving electronic mediums of payments

such as cards, transfers, and other nancial

products (BCE, 2018).

The money supply (M1) in the Ecuadorian

nancial system consists of (1) monetary

species in circulation (currency in circula-

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ISSN 2550-6722

tion), (2) fractional currency, (3) electronic

money, and (4) demand deposits. The evo-

lution of M1 showed a signicant increase

of USD 18,695.32 million to USD 22,634.80

million from 2014 to 2016, respectively. The

most representative account is the currency

in circulation, which on average represents

57.1% of M1 during the same studied pe-

riod. On the other hand, the demand deposits

account varied from USD 9,068.76 million

(2014) to USD 9.281,36 million (2016), and

the Ecuadorian digital currency changed

from USD 0.1 million (2014) to USD 4.1

million (2016). The development of the M1

components is shown as follows in the gure

Bitcoin and stock exchange

The rst step to determine the relationship

between bitcoin and stock exchange is the

visual and descriptive analysis of their close

price. The study is based on the characteri-

zation of bitcoin and main stock exchange

indexes, in American dollars (USD), euros

(EUR) and pound sterling (GBP), other im-

portant cryptocurrencies and principal com-

modities. The information needed to perform

this rst descriptive analysis is available on

(1) Yahoo Finance, section market, subsec-

tion Cryptocurrencies and World Indexes,

(2) Investing section commodities and (3)

Investopedia section Cryptocurrencies.

a.Evolution of bitcoin and the most impor-

tant world cryptocurrencies

Investopedia (2017), which are the following

(in a non-specic order) (table 1) that focu-

ses on investing education, retirement stra-

tegies, and nancial news, denes the six

most important cryptocurrencies other than

bitcoin, which are the showed in a non-spe-

cic order table 1.

The trend analysis includes the series of the

main global cryptocurrencies shown in table

1, with the exception of the virtual curren-

cy called Zcash (ZEC) because its dataset

was formed for 490 observations, and it is

only available from October 27th 2016 to

the present. This manuscript considers 937

observations (close price) from August 6th

2015 to February 28th 2018. The start date

is chosen because all the considered crypto-

currencies have historical data from this date

to the present and it coincides with the rst

day of operations of Ethereum. The databa-

se source is Yahoo Finance, one of the main

web networks, which provides stock quotes,

up-to-date news, portfolio management re-

sources and international market data.

Graphically, all series follow the same path

as the bitcoin close price. For instance, the

Litecoin’s average close price was USD

33.97 during the considered period, its mini-

mum value (USD 2.59) was reached on Sep-

tember 2nd 2015, while its maximum value

(USD 357.51) was achieved on December

18th 2017. On the other hand, Ethereum

cryptocurrency showed its minimal price

(USD 0.42) on October 20th 2015, its maxi-

mum price (USD 1,385.02) on January 13th

2018, and its average close price is USD

152.37.

Dash or darkcoin experimented an average

close price of USD 147.57. The close price

range of this cryptocurrency is USD 1.00

(minimum price on September 08th 2015)

to USD 1,433.41 (maximum price on De-

cember 20th 2017). The virtual currency

denominated Ripple, whose average close

price is USD 0.17, evidenced its lower pri-

ce on November 08th 2015 (USD 0.00) and

its highest value was achieved on January

7th 2018 (USD 2.78). Finally, the Monero

cryptocurrency showed its best close price

performance on December 20th 2017 (USD

467.50), while its worst close price (USD

0.36) was on November 22nd 2015. Figure

3 displays the evolution of bitcoin and the

most important world cryptocurrencies.

b. Evolution of bitcoin and the most

important stock exchange indexes

The stock market could be divided into four

main economic regions, which are: Euro-

pe, the United States, China, and Japan. It

is important to differentiate between index

and market since they are not the same. The

stock exchange is the place where investors

can commerce, buy and sell titles or securi-

ties of listed companies. The index is a ther-

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ISSN 2550-6722

mometer of the stock market of each country

or region, considering that it is elaborated

with the companies with greater capitali-

zation and volume in their markets. There

are many indexes elaborated for analyzing

a specic stock exchange of a determined

region. According to Yahoo Finance, the

most important and recognized worldwide

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indexes are summarized in table 2.

The trend analysis is divided into two parts.

The rst part includes the series of the US

market and the second one contains the

analysis of the European stock exchange.

The Japanese and Chinese market are ex-

cluded because of the availability of infor-

mation. Graphically, it is possible to better

appreciate the trend of the series if the plot is

less loaded, besides the analyzed indexes are

quoted in different currencies (USD, EUR,

and GBP). This research considers observa-

tions (close price) from January 1st 2013 to

February 28th 2018. The period is chosen

because the analysis of the last ve years

allows a long-term perspective of the beha-

vior of these indexes.

The Dow Jones industrial average, along

with the NASDAQ and the S&P 500, ser-

ves as a description for the general market

and the performance of the US economy and

helps investors to get a nancial idea of the

current environment and prospects. Figure 4

shows the volatility of bitcoin compared to

these indexes; all of them are in an ascen-

ding and continuous trend.

The Dow Jones industry average is the in-

dex with the highest market capitalization,

around USD 18,041.08 in the last 5 years.

Its maximum value was USD 26,616.71 on

January 26th 2018. On the other hand, the

NASDAQ index had lower capitalization

than DJI, (USD 4,893.99 on average) it pre-

sented more stable values throughout the

analyzed period, reaching its maximum on

January 26th 2018 with USD 7,505.77.

The same day, the S&P index reached its hi-

ghest capitalization in the last 5 years (USD

2,872.87). This index had the lowest avera-

ge value of capitalization USD 2,057.64. All

the indexes in the US market seem to be re-

lated and follow the same trend.

In the European case, IBEX 35, DAX and

FTSE 100, help investors to understand the

performance of this economy. The prices of

IBEX 35, DAX and bitcoin are given in eu-

ros, while FTSE 100 is given in GBP (gure

5).

The European stock exchange indexes seem

to be more stable during the considered pe-

riod. DAX is the index with the highest mar-

ket capitalization, in average EUR 10,365.48

in the last 5 years. Its maximum value was

EUR 10,609.50 on January 23rd 2018. On

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ISSN 2550-6722

the other hand, IBEX 35 had a lower capitali-

zation than DAX, in average EUR 9,768.23.

Its maximum value was reached on April

13th 2015 with EUR 11,866.40. FTSE 100

index showed its highest capitalization in

the last 5 years (GBP 13,559.59) on January

12th 2018. This index had an average capi-

talization value of GBP 6,741.74. Generally,

the three indexes show a stable trend in the

European economy.

c. Evolution of bitcoin and the most

important commodities

A commodity is dened as a basic good in

commerce that can be interchangeable with

other commodities of the same type (Inves-

topedia 2018). Fungibility is its most impor-

tant characteristic of commodities. It can be

treated in the spot and derivative markets,

and its price is usually determined as a func-

tion of its market as a whole. Commodities

can be classied as raw materials, basic re-

sources and agricultural products.

Investopedia (2018), a global nancial por-

tal which offers stock quotes and internatio-

nal market data, dened the inuence of the

commodity prices as an important factor that

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ISSN 2550-6722

impacts on earnings of public companies,

and, by extension, the markets. In addition,

this nancial company mentions that the ten

most important commodities that move the

markets are (in a non-specic order): wood,

crude oil, cotton, wheat, corn, coffee, gold,

silver, platinum, and natural gas.

This manuscript analyzes only three com-

modities (gold, silver and crude oil) due to

the availability of information (table 3).

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ISSN 2550-6722

Similarly, the trend analysis is done during

the period considered above to easily deter-

minate the relationship between commodi-

ties and bitcoin in the long-term.

The price (future) of gold and silver is sta-

ble during the analyzed period (gure 6). On

average, gold had a price of USD 1,270.69,

its maximum value (USD 1,692.80) was

reached on January 23rd 2013 and the mi-

nimum value (USD 1,050.80) on December

17th 2015. Silver experimented an average

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ISSN 2550-6722

close price of USD 18.48.

The range of its price was USD 13.66

(lowest value on December 14th 2015) to

USD 32.41 on January 23rd 2013. The com-

modity called Crude Oil WTI had an avera-

ge price of USD 66.70 showing its lowest

value (USD 26.21) on November 2nd 2016

and its highest price (USD 110.53) on June

9th 2013. Commodities prices have shown a

stable trend during the studied period, while

bitcoin price is characterized by its volatility.

Correlation analysis

Finally, three hypotheses are proposed:

• Hypothesis 1: Positive correlation between

bitcoin and the main world cryptocurrencies.

• Hypothesis 2: Positive correlation between

bitcoin and the most important stock ex-

change indexes.

• Hypothesis 3: Positive correlation between

bitcoin and the main commodities.

A linear correlation analysis is performed

between bitcoin, main stock exchange in-

dexes, other important cryptocurrencies and

principal commodities. This computation is

a crucial part to test the hypotheses and was

made using the software RStudio version

1.1.423. The database sources are (1) Yahoo

Finance, section market, subsection Crypto-

currencies and World Indexes, (2) Investing

section commodities.

Hypothesis 1: Positive correlation between

bitcoin and the main world cryptocurrencies

The data is obtained from Yahoo Finance,

section Cryptocurrencies. The number of

observations are 937 from August 6th 2015

to February 28th 2018.

The linear correlation between bitcoin and

the ve most important cryptocurrencies is

positive and signicant at least at 0.05 level

(table 4). The highest correlation coefcients

are presented between bitcoin and Dash

(0,978), and bitcoin and Monero (0,969). On

the other hand, the lowest correlation coef-

cient is evidenced between bitcoin and Ri-

pple (0,821). It is important to mention that

the strongest correlation (0,984) is shown

between Dash and Monero.

Using the graphical and correlation analysis,

hypothesis 1 is accepted. It can be concluded

that bitcoin has a large inuence on crypto-

currencies market.

Hypothesis 2: Positive correlation between

bitcoin and the main stock exchange indexes

In this section, the linear correlation be-

tween bitcoin and the six most important

stock exchanges is calculated to test if bit-

coin has any inuence on the European or

the US market using the data provided by

Yahoo Finance in its section World Indexes.

This research considers 1,274 observations

(close price in USD) from January 1st, 2013

to February 28th 2018.

All the correlations are positive and signi-

cant at least at 0.05 level (table 5). The hi-

ghest correlation coefcient is between bit-

coin and DJI (0.787). Otherwise, the lowest

correlation coefcient is evidenced between

bitcoin and IBEX 35 (0.182). However, this

index (IBEX 35) presents low correlation

values with all other considered values.

It can be concluded that bitcoin is related to

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ISSN 2550-6722

the main indexes in the American and Eu-

ropean markets, although its volatility does

not seem to inuence these markets. It is

necessary to mention that all the considered

indexes, except bitcoin, maintain a high de-

gree of positive correlation between them;

specially the US market indexes that have

correlation coefcients greater than 0.95

showing the strong relationship that stock

exchanges have between them.

The hypothesis 2 is accepted using the gra-

phical and quantitative analysis and conclude

that bitcoin has a correlation with the stock

exchange indexes in the long term, but it is

not stronger than the relationship between

the main cryptocurrencies and bitcoin.

Hypothesis 3: Positive correlation between

bitcoin and the main commodities

The analysis is performed with 1,299 obser-

vations (close price in USD) from January

1st 2013 to February 28th 2018. The data

source is Investing, section Commodities.

Hypothesis 3 is rejected since the linear co-

rrelation coefcients are lower between bit-

coin and the considered commodities (table

6). The obtained results show a minor linear

correlation between bitcoin and commodi-

ties. The correlations between bitcoin, silver

and crude oil WTI are negative. However,

the degree of correlation between the varia-

bles is less than 0.2.

On the other hand, the analyzed commodi-

ties have a strong correlation between them,

especially silver and gold, with values hi-

gher than 0.9.

REVISTA CHAKIÑAN, 2018, Nº.5, AGOSTO, (54-72)

ISSN 2550-6722

CONCLUSIONS

RECOMMENDATIONS

This study conducted a global analysis of the

bitcoin situation since its appearance in the

nancial market. The graphical analysis and

empirical evidence showed that the volatility

of bitcoin prices and its speculative power

are the main characteristics of this virtual

currency. In addition, a correlation analysis

was performed to test the three proposed

hypotheses.

The study indicates that hypothesis 1: positi-

ve correlation between bitcoin and the main

world cryptocurrencies, can be supported.

It has been proved that there is a strong co-

rrelation between bitcoin and other crypto-

currencies in the long-term. The graphical

evidence also shows that cryptocurrencies,

including bitcoin, have similar trends during

the considered period. Bitcoin is the most

stable digital currency and it is often the me-

chanism that investors access to the crypto-

currency market.

Hypothesis 2: positive correlation between

bitcoin and the most important stock ex-

change indexes, is accepted. The dynamic

price of bitcoin has a relationship with the

uctuations in the stock exchange indexes;

however, it is not as strong as the relations-

hip between the main cryptocurrencies and

bitcoin. The graphical analysis displays di-

fferent patterns between bitcoin and stock

exchange indexes. Besides, stock exchanges

indexes show a strong relationship between

them maintaining a high degree of positive

correlation.

Hypothesis 3: positive correlation between

bitcoin and the main commodities, cannot

be supported. The results show a low linear

correlation between bitcoin and the three

analyzed commodities. Actually, commo-

dities have a stable price index during the

considered period, while bitcoin is highly

volatile.

This paper provides several directions for

future work. First, an interesting approach

is to focus on analyzing the short and long-

term relationship between bitcoin and cryp-

tocurrencies and stock exchange indexes

used in this study. Second, this manuscript

could be replicated by improving the statis-

tical techniques and employing other cryp-

tocurrencies and stock exchange indexes

to demonstrate the validity of the achieved

results. Third, different time series techni-

ques can be applied to predict the behavior

of cryptocurrencies.

REVISTA CHAKIÑAN, 2018, Nº.5, AGOSTO, (54-72)

ISSN 2550-6722

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