Introduction
This article examines extreme movements in the price of Bitcoin. Since the inception of Bitcoin in 2010 the price of Bitcoin has shown wild swings with impressive booms and busts.
Gangwal and Longin used extreme value theory to study the statistical distribution of extreme price movements And calculate risk measures commonly used by financial institutions in risk and asset management. they also drew some conclusions about Bitcoin's status as a currency or speculative asset which is important for practical matters.
The objective of this article is to introduce some statistical price properties of Bitcoin focusing on its price movements.
So, the problem that we must find an answer to this question : Is Bitcoin a currency or a speculative asset?
Bitcoin as a currency?
- As a currency, Bitcoin should be used to buy and sell goods and services. The use of Bitcoin as an intermediary in exchanges is quite limited. Few e-commerce sites accept payment in Bitcoin, however, their number seems to increase over time.
- As a currency, bitcoin should be used as a unit of account, that is, a monetary unit of measurement used to represent the real value of any economic element: the displayed price of goods and services, the value of assets and liabilities of companies, the amount of wages in employment contracts and the amount of taxes that households have to pay. Although Bitcoin can sometimes be used as a means of payment, the price in euros, dollars or other currencies is converted at the time of payment. This situation is certainly explained by the great instability of Bitcoin prices compared to traditional currencies. Thus, Bitcoin is associated by such extreme volatility as for its use as a unit of account.
- As a currency, Bitcoin should be used as a store of value. By holding Bitcoins, an economic agent should be able to transfer his purchasing power over time, especially in the short term. Due to its extreme volatility, Bitcoin cannot be considered a market value. It should be noted that during the financial crisis in Cyprus in March 2013, Bitcoin was considered a safe haven whose availability (through the construction of peer-to-peer networks without a central authority) and liquidity (existence of financial markets to exchange Bitcoins for other currencies) allowed some individuals in Cyprus to bypass the restrictions imposed during the crisis (no access to deposits, no money available at ATMs, banks closed for 12 days). More precisely, Bitcoin can be considered as a safe haven investment like gold with more advantages (availability and liquidity) in times of crises.
Bitcoin as a speculative asset?
Unlike traditional financial assets (such as stocks and bonds), Bitcoin does not generate financial cash flows (such as dividends and interest) that allow a fundamental value to be estimated.
In other words, Bitcoin does not have an intrinsic value. As a result, it is associated with high volatility. Bitcoin must, then, be considered as a speculative asset whose value stems from the trust placed by investors. When confidence increases, the price of assets increases exponentially.
Methodology
In this research Gangwal and Longin used some data:
For the sampling period: 10/10/2010 to 02/08/2016
All data is collected from "Bloomberg"
Here are the measures used: expected shortfall (ES), value at risk (VaR), stress testing
Result
- Descriptive analysis:
Regarding the daily volatility of Bitcoin is equal to 7.18%. This implies the erratic behavior of Bitcoin prices. The Skweness coefficient is negative and equal to -48.62, indicating a left asymmetry in the distribution of Bitcoin returns.
- The self-correlation of daily returns and squared returns of Bitcoin :
Gangwal and Longin find that the self-correlation coefficients of Bitcoin's daily returns for the various offsets (from 1 day to 20 trading days corresponding to a calendar month) are close to zero. This is consistent with the efficient market hypothesis.
- High positive Bitcoin price trend,
- High volatility,
- Negative skweness,
- high kurtosis,
- The auto-correlation for Bitcoin returns is close to zero,
- The self-correlation for squared yields is positive
The extreme price movements of Bitcoin :
1) Distribution of extreme values :
Gangwal and Longin adopt the method of peaks above the threshold to determine the extreme yields. In other words, they take a threshold for price returns (defined as a percentage) and, then, they select all the returns that are above (below) this threshold for the positive (negative) extreme returns. This threshold denoted θ corresponds to a probability tail p of the distribution of yields.
The tail index is the most important parameter of the distribution of extreme values because it measures the weight of the tails of the distribution. A positive value of the tail index ξ corresponds to a fat-tailed distribution (Fréchet distribution), a zero value to a thin-tailed distribution (Gumbel distribution), and a negative value to a tailless distribution (Weibull distribution).
Gangwal and Longin find a negative θ threshold (-18.00%) and a positive θ threshold (12.65%).
For these two values, the tail probability for the left tail and the right tail is equal to 1.67%. The estimates of the scale parameters are similar for the two tail probabilities (4.24 for the left tail and 5.62 for the right tail).
The main difference lies in the tail index: the tail index on the left is equal to 0.34 and statistically different from zero while the tail index on the right is equal to 0.03 and not statistically different from zero. This indicates that there is a heavier tail on the left with many crashes and a thinner tail on the right.
2) Risk indicators for Bitcoin :
That is, the risk indicators for the long position use the left tail of the distribution. While, the short position is sensitive to a rise in Bitcoin prices. This means that the risk indicators for the short position use, then, the right tail of the distribution.
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