Abstract
In this paper we analyze the existence of cointegrating relationships between Bitcoin, S&P 500, and the quantity of money M2. We perform our analysis with and without applying time warping pre-processing. In all cases we find strong evidence that, in the period 2016-2021 the three time series show two cointegrating relationships and therefore share a common stochastic trend. In addition, a low correlation between Bitcoin and S&P 500 is detected. These finding justify the increased interest of investors in Bitcoin as an alternative asset class. The economic interpretation is that the stock valuation is primarily determined by financial phenomena, in particular the availability of large quantity of money. Money supporting investment is due both to the actions of Quantitative Easing and to the exchange of creditor/debtor role that took place between households and firms. The price of both Bitcoin and stocks is increasingly influenced by the amount of money in circulation and follows the same stochastic trend.
Highlights
The price of Bitcoin has reached levels that would have been difficult to imagine just a few months ago
Bitcoin is increasingly viewed as a trading asset class even by institutional investors
In this paper we find that Bitcoin, S&P 500, and M2 are cointegrated time series suggesting that M2 is a driver of both S&P 500 and Bitcoin
Summary
The price of Bitcoin has reached levels that would have been difficult to imagine just a few months ago. The recent price increase of Bitcoin, that went from 5000 dollars in March 2020 to values above 60000 dollars in April 2021, suggests looking for phenomena of great magnitude and of great impact One such phenomenon is the monetary policy of central banks. We use the Johansen cointegration test to analyze the possible link between Bitcoin, the monetary mass M2 and S&P 500 Index and we claim that the M2 is a factor that drives both stock markets and Bitcoin. There is a widespread belief that stock prices depend on financial factors This fact makes the behavior of stock prices more akin to that of Bitcoin and makes Bitcoin an attractive asset class. The rest of the paper is organized as follows: in Section 2 we describe the impact of money on financial assets; Section 3 is devoted to data description and empirical analysis and in Section 4 we offer some concluding remarks
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