Bitcoin: Financial Instrument or Speculative Asset? An Analysis of Bitcoin in the Foreign exchange Market

Abstract

This paper uses four empirical models – a single variable linear regression, the Capital Asset Pricing Model, and two multivariate linear regression models – to derive the balance between Bitcoin’s usefulness as a hedge, safe haven, or diversifier and its use as a speculative asset. This study found that Bitcoin acts as a hedge against the EUR, CNY, JPY, RUB, GBP, S&P 500, and the United States Three-Month Treasury Bill Rates. It acts as a diversifier for the KRW and a global commodities index. Bitcoin acts as a safe haven against each of the currencies in this study. Lastly, Bitcoin’s returns show a positive relationship with the currency returns of democratic countries that increase the level of their democracy, and an inverse relationship with the currency returns of authoritarian countries that decrease their level of democracy. The study then concludes that Bitcoin acts as a financial instrument to hedge political instability for Chinese and Russian investors and acts as a financial instrument to diversify against political instability for British investors. However, Bitcoin acts as a speculative asset for all other currencies in the study, which comprise approximately 90% of exchange volume from fiat currency into Bitcoin.