[Podcast] Bitcoin - an Alternative or a Complementary Product to Investors in Markets like Vietnam, China, India and Japan?

31 Mar, 2023

Researches on cryptocurrencies (Bitcoin), up to the present time, have often concentrated on looking at the relationship between Bitcoin’s return and stock indexes with the purpose of assessing the ability to use Bitcoin so as to diversify portfolios as well as to be one hedge or one safe-haven asset for stock indices. Very few studies have been interested in the cointegration (long-term relationship) between Bitcoin and stock indices. By using Auto-Regressive Distribution of Latency (ARDL), this article provides empirical results on the impact of Bitcoin price on stock indices within several Asian countries; therefore, setting foundation for future studies on the impact of Bitcoin on the stock market is one availability.

The presence of Bitcoin in Asian Economies

Bitcoin is a cryptocurrency with the largest transactional value in the world. According to the data from Coinmarketcap website, as that in February 2021, the total value of Bitcoin in the market is more than 916 billion USD, far ahead that of those coins in the 2nd and 3rd places: Ethereum (204 billion USD) and Tether (32 billion USD), respectively. The event that an American company - Tesla - invested 1.5 billion USD in Bitcoin and announced their plan to accept customers using this currency in purchasing their cars marked a sudden increase in Bitcoin’s price when it hit 48,000 USD on February 9th, 2021, setting the highest price peak in history. A week later, on February 16th, 2021, the record was broken again as the Bitcoin price surged to over 49,000 USD. Bitcoin, although its price did fall deeply in 2022, is being the leading cryptocurrency in terms of transaction value in the world. The above information reflects the great interest, over the past few years, that the public, the investors, the researchers, the regulators and so on have towards Bitcoin in particular and the development of cryptocurrencies in general since the birth of Bitcoin in 2008. It should be noted that besides the advantages (listed as: fast international payments, savings, ensuring the privacy of transactions, not being controlled by governments, avoiding inflation like fiat currencies), there are huge risks listed as: threatening the existence of financial intermediaries, affecting the monetary policy of countries and creating favorable conditions for criminals to evade taxes, hackers and other types of criminals.

One survey in 74 countries in 2020 indicated that Vietnam ranks at the 2nd place in the world in terms of the percentage of respondents who have ever used or owned cryptocurrencies. Specifically, this rate of Vietnam is 21%, just behind that of Nigeria as 32% and much higher than that of countries with large economies like China (7%), US (6. %), Germany (5%) and Japan (4%), respectively. Another survey in 2019 affirmed that Vietnam ranked at the 16th position in the world and the 2nd place in Southeast Asia in terms of the number of visits to cryptocurrency websites. The above data is the evidence demonstrating the great interest of Vietnamese investors in cryptocurrencies in general and Bitcoin in particular. However, the researches on cryptocurrencies in Vietnam in the previous time have mostly focused on the legal aspects and policies of Bitcoin management while the relationship between Bitcoin and the stock market has been left unanswered.

Asian countries, especially those with large economies listed as China, Japan, and India, are ranked at high-ranking positions related to the visits to crypto websites. Specifically, Japan holds the 2nd position, while India and China are ranked at the 5th and 6th positions, respectively. This proves that Bitcoin is completely an interesting topic in these countries.

The necessity to consider the impact of Bitcoin on the stock market

In major Asian economies listed as China, Japan and India, a number of studies have been conducted with the purpose of analyzing the link between Bitcoin and the stock market; in which, most of them focus on the relationship between the rate of return of Bitcoin and the stock indices so as to gauge the potential use of Bitcoin in portfolio diversification as well as to be used as a hedge or a haven asset for stock indices. Nevertheless, very few studies have been interested in the cointegration (long-term relationship) between Bitcoin and stock indices; furthermore, the results obtained are inconsistent. Wang et al. (2019) did not find the co-link between Bitcoin and China’s CSI 300 Index. Dirican & Canoz (2017) found no long-term relationship between Bitcoin price and Japan’s Nikkei 225 index; on the other hand, they did find the co-link between Bitcoin price and the stock indices in US and Chinese markets. Dirican & Canoz (2017) suggested that: when a co-link is found between the Bitcoin price and stock indices, the investors’ decisions in these countries to buy and to sell securities may be influenced by the Bitcoin price in the long-term future. Zhu et al. (2017) assessed the impact of economic factors on Bitcoin price during the 2011-2016 period with monthly data and found the evidence of cointegration, in which, the USD has the strongest impact upon the Bitcoin price.

The argument for Bitcoin’s impact on the stock market was probably first mentioned in the research by Sami & Abdallah (2020), where they found the evidence of the impact of the rate of return of Bitcoin on the stock exchange markets in the Middle East and North Africa (MENA). Sami & Abdallah (2020) argued that: if Bitcoin and securities are complementary products, in case of the increasing price of Bitcoin, investors buy securities to diversify their portfolios (in order to maintain a relative proportion among the asset classes in portfolio), leading to an increase in stock prices. Conversely, if Bitcoin and stocks are substitutes, Bitcoin price will have a negative effect on stock price. Specifically, when investors expect Bitcoin to increase in value, they can shift money from stocks to Bitcoin, causing the stock price to fall. In the opposite direction, when investors expect Bitcoin to fall, cash flow can shift from Bitcoin to stocks, causing stock prices to increase. Therefore, which way that Bitcoin affects stock prices seems to be an empirical question, in which the answer depends on whether the investor in the particular country is primarily using Bitcoin as an alternative product or a complementary product to diversify that investor’s personal portfolio.

This paper, based on the arguments of Sami & Abdallah (2020), is to assess the impact of Bitcoin price on stock indexes VN-Index (Vietnam), SSE Composite Index (China), BSE SENSEX (India) and Nikkei 225 (Japan) from October 2014 to August 2020 by using the Autoregressive Distribution of Latency (ARDL) approach. The stock markets, considered in this paper, include both the frontier market (Vietnam) and the two largest economies as emerging and developing countries (China and India) in Asia as well as the third largest developed economy in the world (Japan). These countries achieve the high rankings for the number of visits to Bitcoin trading websites. The difference in the levels of development of the markets will allow this paper to assess the influence of the Bitcoin price on stock indices in a more comprehensive scale.

Bitcoin and stocks in Vietnam, China, India and Japan as complementary products

This article uses the monthly data from October 2014 to August 2020. VN-Index is provided by VNDIRECT Securities Company. SSE Composite Index (China), BSE SENSEX (India), Nikkei 225 (Japan) and Bitcoin prices are collected from finance.yahoo.com website.

The research results indicate that Bitcoin price, for Vietnam, has a positive impact on VN-Index in the long term. Moreover, in the short term, Bitcoin presents the positive impact on the VN-Index. Similar to the case of Vietnam, the estimates for China’s SSE Composite Index, India’s BSE SENSEX and Japan’s Nikkei 225, all of which affirm the same long-term and short-term impact of Bitcoin price. This result supports the hypothesis that Bitcoin and securities are complementary products. In the study by Sami & Abdallah (2020), the positive effect of Bitcoin returns on the stock market is also found in Egypt, Israel, Jordan, Lebanon and Morocco. This positive relationship is explained by investors using Bitcoin and securities as investment products to diversify their portfolios.

In summary, the results of this paper confirm the existence of the co-link between Bitcoin and VN-Index, SSE Composite Index, BSE SENSEX and Nikkei 225 within the research period as well as the positive relationship between Bitcoin and research stock indexes supports the argument that Bitcoin and stocks in Vietnam, China, India and Japan are complementary investment products. However, these are purely experimental results. In fact, Bitcoin investment and trading activities have not been regulated by law in many countries, including Vietnam, yet; consequently, this type of investment implies high risks for investors and may beyond the benefits of diversification.

Please view the full paper titled Bitcoin - An Alternative or A Complementary Product to Investors in Markets like Vietnam, China, India and Japan? at HERE. Author group: Assoc. Prof. Dr. Tran Thi Hai Ly and Ph.D Student Ho Hoang Gia Bao, Faculty of Finance, University of Economics Ho Chi Minh City.

This article is in the series Spreading research and applied knowledge from UEH with “Research Contribution For All - Nghiên Cứu Vì Cộng Đồng” message, UEH cordially invites dear readers to look forward to the upcoming Knowledge Newsletter ECONOMY #68.

News, photos: Author group, UEH Department of Marketing and Communication