Analysis of the Effect of Exchange Rate Fluctuations on Bitcoin Returns: A Time Series Approach in a Digital Finance Perspective

Abstract

Cryptocurrencies, including Bitcoin, have been the subject of great attention in the media and academia due to their large price fluctuations. This study aims to analyze the effect of exchange rate fluctuations (USD/AUD, USD/EUR, USD/GBP, and USD/JPY) on Bitcoin returns in the period 2014 to 2019 using a time series approach. We applied the ARMA model and the Maximum Likelihood Estimation method to analyze the data. The results showed that exchange rate fluctuations had no significant effect on Bitcoin's returns when confidence was measured at a rate of 95 percent. However, when significance was measured at a rate of 90 percent, GBP was found to have a significant effect on Bitcoin returns. This may be due to common factors affecting the simultaneous returns of USD/GBP and Bitcoin in recent times. Future studies may consider investigating the effect of exchange rate fluctuations on other cryptocurrencies, other than Bitcoin, to gain a more comprehensive understanding of the effect of exchange rates on digital assets in a digital finance perspective.