Application of Error Correction model with monetary function factors in the return of bitcoin

Abstract

Bitcoin is a kind of virtual currency based on block chain technology. In many scenarios, it shows the function of currency to a certain extent. However, many believe that the value of Bitcoin is hollow, speculative and unable to undertake monetary functions, which prevents it to circulate as a real currency. This paper assumes that Bitcoin can undertake monetary functions, which can verify the relationship between monetary functions and Bitcoin earnings. According to the availability of the data and the previous research results, the monthly value of the indexes to measure the monetary function from 2010 to 2020 are selected to form a regression equation with the monthly return data of Bitcoin in the corresponding period. ADF test shows that the explained variable is a first-order simple integer, and the explanatory variables have both first-order simple integer and stationary sequence, and there is a cointegration relationship between them. The result of error correction model shows that the relationship between Bitcoin rate of return and the relevant indicators to measure monetary function is not significant, which rejects the original assumption that Bitcoin can assume monetary function, indicating that Bitcoin does not have the ability and potential to assume monetary function. This may be due to the speculative nature of Bitcoin and the lack of powerful credit support. Therefore, investment in Bitcoin needs to be cautiously thought, but the blockchain technology used in Bitcoin needs to be vigorously developed, which could lead to a technological revolution; in addition, it is momentous for countries to develop digital currencies of central bank to meet the challenge.