The Influence of Kenya’s monetary policy and investor behaviour on its cryptocurrency markets performance

Abstract

This study investigates the relationship between Kenya’s monetary policy and local investor behaviour and the performance of its price taking cryptocurrency markets. There is growing interest in cryptocurrencies mainly driven by emerging markets. These markets have non-existent or limited cryptocurrency regulation leading to many grey area transactions. Though there are increased attempts by developed nations to create and apply cryptocurrency regulations, there is little or no attempt for price taking developing nations cryptocurrency exchange markets. To ensure safe and beneficial use of cryptocurrencies, effective controls must exist that are informed by an understanding of current market dynamics within the reach of developing nations. This study investigates two major financial market dynamics (i.e monetary policy and local investor behaviour) and their associative relationship to cryptocurrency markets performance to determine if they are within reach of national monetary policies and affected by local economic conditions. Based on the theoretical foundation of Modern Theory of Interest and Behavioural Asset Pricing Theory, high frequency data was obtained for the period of 1st January 2016 to 23rd September 2021 from various sources including 2 cryptocurrency exchange markets, the Central Bank of Kenya, and the Twitter social media platform. A Vector Autoregressive (VAR) model supported by GARCH models (gjrGARCH and DCC-GARCH) was used to analyse not only the relationship between the variables but also their volatility. The study concludes that local Cryptocurrency Markets are affected by local monetary policies and local conditions like the performance of the stock exchange, local public sentiments, and local uncertainty. Exchange Rates and Interbank Rates significantly affect cryptocurrency trade volumes. Global Sentiments have a short-term effect on cryptocurrency trade volumes, while local sentiments have long-term persistent spillover effects. The study also concludes that local cryptocurrency investors are motivated by the potential for super normal gains rather than the fear of losing returns. This implies that the government should allow the establishment and regulation of cryptocurrency markets. Secondly, the government should establish vibrant and efficient NSE to provide hedging opportunities to cryptocurrency risks. The CBK must expand its information role to cover provision of cryptocurrency information in policy briefing while investors should incorporate local conditions in their investment models for more accurate predictive models.