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 research aims to analyze the influence 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 apply the ARMA model and the Maximum Likelihood Estimation method to analyze the data. The results show that exchange rate fluctuations do not have a significant effect on Bitcoin returns when trust is measured at the 95 percent level. However, when significance is measured at the 90 percent level, GBP is found to significantly influence Bitcoin returns. This may be due to common factors influencing the returns of USD/GBP and Bitcoin together in recent times. Future studies may consider investigating the influence of exchange rate fluctuations on other cryptocurrencies, besides Bitcoin, to gain a more comprehensive understanding of the influence of exchange rates on digital assets from a digital finance perspective.