Empirical evaluation of the relationship between Bitcoin and domestic currencies in Africa
Kalu, Elizabeth M'meneni
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Bitcoin trading has gained momentum in the African continent as well as in the world. As is so, it is crucial to understand how the development of bitcoins would affect a given economy, especially because the operation of bitcoins is beyond the governing eye of any Central Bank. This research seeks to study Bitcoin as a currency and establish what impact it would have on the domestic currencies of nations which have significant Bitcoin trading activity in Africa. This impact will be evaluated using the Random Effects method of estimation. The research will further evaluate the long-term relationship, if any, between bitcoins and selected domestic currencies in Africa using the Kao and Perdoni residual Co-integration tests. The countries of focus in this research include Kenya, Morocco, Nigeria and South Africa, which were observed between 2014 and 2017. The choice of these countries and the duration of observation is due to the ease of availability of data on Bitcoin trading. Results confirmed the existence of a statistically significant relationship between the amount of bitcoins in circulation and macroeconomic variables such as exchange, interest and inflation rates. No long-term relationship was established and the Vector Autoregressive test was performed to capture the linear interdependencies among the variables. The conclusion drawn from this study is that as the number of bitcoins increases in a given economy, the domestic currency suffers devaluation. Due to this, governments are recommended to keep a watchful eye over bitcoin transactions in their respective economies as well as looking into the development of competitive central backed cryptocurrencies over which they would have total control.