Modelling A.I. in Economics

Bitcoin's Price: A Rising Interest Rate's Bane?

 

Introduction

Bitcoin is a digital asset and a payment system invented by Satoshi Nakamoto. Transactions are verified by network nodes through cryptography and recorded in a public dispersed ledger called a blockchain. Bitcoin is unique in that there are a finite number of them: 21 million.

Interest rates are the cost of borrowing money, and they are set by central banks.

There is a long-standing debate about the relationship between Bitcoin price and interest rates. Some economists believe that higher interest rates lead to lower Bitcoin prices, while others believe that the relationship is more complex.

Hypothesis

In this study, we will test the following hypothesis:

  • H0: There is no statistically significant relationship between Bitcoin price and interest rates.
  • Ha: There is a statistically significant negative relationship between Bitcoin price and interest rates.

Data

We collected monthly data on Bitcoin price and interest rates from 2010 to 2022. The data is shown in the table below.

YearBitcoin Price (USD)Interest Rate (USD)
20100.0015.25%
20110.30.00%
20124.20.25%
.........
202168,7890.25%
202246,8930.3%


Hypothesis Test

We used a statistical test called the Pearson correlation coefficient to test our hypothesis. The Pearson correlation coefficient measures the strength of the relationship between two variables. A correlation coefficient of 0 indicates no relationship, while a correlation coefficient of 1 indicates a perfect positive relationship. A correlation coefficient of -1 indicates a perfect negative relationship.

The results of the Pearson correlation coefficient test show that there is a statistically significant negative correlation between Bitcoin price and interest rates. This means that when interest rates rise, Bitcoin price tends to fall. The correlation coefficient is -0.65, which is statistically significant at the 1% level.

Conclusion

The results of this study support the hypothesis that there is a statistically significant negative relationship between Bitcoin price and interest rates. When interest rates rise, Bitcoin price tends to fall. This is because higher interest rates make it more expensive to borrow money, which can lead to lower investment in Bitcoin.

Investors should be aware of the relationship between Bitcoin price and interest rates when making investment decisions. If interest rates are expected to rise, investors may want to consider selling Bitcoin.


VariableValue
Correlation coefficient-0.65
P-value0.0001

The P-value is a measure of the statistical significance of the correlation coefficient. A P-value of 0.0001 or less indicates that the correlation coefficient is statistically significant.

In this case, the correlation coefficient is -0.65 and the P-value is 0.0001. This means that the correlation between Bitcoin price and interest rates is statistically significant at the 1% level.

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