A peer-to-peer system of blockchain, originally started for a cryptocurrency Bitcoin, has caused major disruptions in the stock market. It has affected many businesses if not all, but its significance in the financial world is magnanimous. Historical data (daily rates) for the past 23 months are analyzed to understand the market size, market capitalization and price volatility for Bitcoin. Time series data and financial model are applied to realize the shocks. Monte Carlo simulation is applied to assess the dynamic structure of Bitcoin. With greater volume and activity, the banks and financial intermediaries may become outdated, and the middleman will have no place. It seems like a distant thought, but the facts are pointing toward its reality.
- stock market
- Monte Carlo
Change is the only
Prominent Market Analysts  compare it to the “sharing” economy, which is expected to grow from $15 billion in 2015 to $335 billion by the year 2025, according to a report by PricewaterhouseCoopers. Airbnb, founded in 2008, is a notable player in the sharing economy. The company provides a platform for property owners and visitors to agree and transact short-term rental contracts. While it does not own rental properties, Airbnb today has over 2 million listings in 34,000 cities in 191 countries, generating annual revenue of over $1 billion with a market value of $24 billion.
The decentralized cryptocurrency, Bitcoin, relies on blockchain technology to record its transactions in a public ledger: a technology originally conceived for Bitcoin in 2008 and first implemented in 2009. The blockchain  is a distributed database that maintains a continuously growing list of records called blocks secured from tampering and revision. Each block contains a timestamp and a link to a previous block. It serves as the public ledger for all transactions. Every compatible client can connect to the network, send new transactions to it, verify them, and take part in the competition to create new blocks. The competition creating new blocks is known as mining. The Bitcoin design has been the inspiration for other applications and certainly for other cryptocurrencies. If blockchain technology is like metal, then Bitcoin is like gold (Figure 1).
2. Cryptocurrencies and the world economy
The last thing on every analyst’s mind was Bitcoin surpassing the gold rate. Even the tech-gurus could not predict it, as gold is a league of its own. A lot was dependent upon the US inflation rates and China’s trading opportunities, while political instability being a constant factor. A volatile asset witnessed the making of overnight billionaires in a matter of seconds, when the price jumped from $700 to $2100+. The youngsters, who were merely experimenting with it, became “accidental millionaires”, and history was made. Dash, Doge, Litcoin, PlexCoin, Ethereum and many more cryptocurrencies made their way to the volatile market to leave a mark of their own. While the price of gold remained flat in the last year, there has been an eruption of the virtual currencies while bringing down the fiat currencies. With the market trends going anywhere with prediction, the shift is incorrigible, the facts are surprising and more shocks are due.
A closer look in the historical rates of Bitcoin raises the question about the future of cryptocurrencies. With a surge of supply and demand, analysts are marking the mining to be completed by the year 2041. What needs to be seen is the price volatility post mining. The world changes at the speed of light, they say, the world of technology is even faster, quicker, not only in terms of change but also in terms of implementation. Figure 2 shows the price volatility in Bitcoin in the US Dollar since Sep 2015. The daily data for the Bitcoin Price Index have been derived from coindesk .
Tapscott , author of Blockchain Revolution and one of the top most influencers of the world, quoted:
2.1.The stock market volume and the dollar value
Trading volume is generally reported not only in terms of number of shares but also in terms of the dollar value. These are the two most fundamental figures in the stock market, the price and the volume. In public stock exchanges, shares are publicly traded, transactions are recorded and the volumes are displayed. Hence, it becomes easy to calculate the trading volume for such stock exchanges. To better understand this trade volume, let us consider the following example:
Suppose that Samsung only changes hands twice during the day. Let’s assume that 20 million shares were bought at $10 a share; later 30 million shares were purchased at $10.5 a share.
The total trading volume = 20 +30 = 50 million shares
Dollar amount equals = (20X10) + (30X10.5) = $515 million
So, the total circulation of Samsung Shares is 515 million for that day.
3. Empirical analysis
There is a plethora of information about Bitcoin. The blockchain provides free information about every detail of the market on an hourly basis. To better understand the market size of Bitcoin, market capitalization  data are used. Further investigation is carried out to understand the price impact of Bitcoin as a currency against the US Dollar and the economic movement in terms of a commodity, and the following time series variables are analyzed. The sample is taken from Sep 2015 till July 2017 from coinmarketcap .
Total Bitcoins in circulation: market capitalization
Estimated output volume
Bitcoin price changes
A regression analysis is used to explain the impact of the variables, market capitalization (CAP), output volume (VOL) and Bitcoin closing price (BTC), and then the relationship of the regression equation to the model is discussed. The best regression equation, based on the analysis of DW (Durbin-Watson), AIC (Akaike
|R-squared||0.994337||Mean dependent var||825.9079|
|Adjusted R-squared||0.994320||S.D. dependent var||628.2927|
|S.E. of regression||47.35140||Akaike info criterion||10.55743|
|Sum squared resid||1,533,634||Schwarz criterion||10.57722|
|Log likelihood||−3623.476||Hannan-Quinn criter.||10.56508|
From the resultant equation, the t-statistics, r-squared and adjusted r-squared show a strong positive relation and suggest that the regression equation fits well as indicated in Figure 4.
3.2. The augmented Dickey-Fuller (ADF) unit-root test
ADF is used under the three conditions for every time series. The random process includes intercept (c) and trend (t), second includes intercept (c) but no trend (0) and third includes no intercept (0) and trend (t). It was observed that each variable under the Augmented Dickey-Fuller test statistic has a unit root at various lag lengths. This augments the data and the model (Figure 5).
3.3.Objectives of the gradient function
Table 2 and Figure 4 allow us to observe the gradients of the objective function for Bitcoin and to help us find a unit root before applying the cointegrating techniques. The result indicates that all the variables, Bitcoin price, market capitalization and volume have a unit root in their levels and are stationary in their first-order differences (Figure 6 and Table 3).
|Null hypothesis: D(BTC) has a unit root|
|Lag length: 0 (automatic-based on SIC, maxlag = 19)|
|Augmented Dickey-Fuller test statistic||−27.86005||0.0000|
|Test critical values:||1% level||−3.439668|
|Null hypothesis: D(VOL) has a unit root|
|Lag length: 4 (automatic-based on SIC, maxlag = 19)|
|Augmented Dickey-Fuller test statistic||−17.96755||0.0000|
|Test critical values:||1% level||−3.439724|
|Null hypothesis: D(CAP) has a unit root|
|Lag length: 0 (automatic-based on SIC, maxlag = 19)|
|Augmented Dickey-Fuller test statistic||−26.47374||0.0000|
|Test critical values:||1% level||−3.439668|
|C||−8.16E−11||−1.19E−13||6.36E−17|3.4.Var cointegration test statistic
|At most 1*||0.037385||27.81187||15.49471||0.0004|
|At most 2||0.002675||1.826802||3.841466||0.1765|
|At most 1*||0.037385||25.98507||14.26460||0.0005|
|At most 2||0.002675||1.826802||3.841466||0.1765|3.5.Granger causality tests
The Granger causality test is used to analyze further the relationship between the three variables. Pairwise tests are carried out in Eviews, and results are shown in Table 5. When the lag is 2, the Granger-cause between the variables does not exist. Hence, this proves that the above cause-and-effect relationship is unidirectional and not bidirectional for BTC.
|VOL does not Granger Cause BTC||685||3.49151||0.0310|
|BTC does not Granger Cause VOL||32.2346||4.E−14|
|CAP does not Granger Cause BTC||685||3.58576||0.0282|
|BTC does not Granger Cause CAP||10672.5||0.0000|
|CAP does not Granger Cause VOL||685||28.1865||2.E−12|
|VOL does not Granger Cause CAP||10.9612||2.E−05|3.6.Impulse response function
To categorize the dynamic structure of Bitcoin, the Monte Carlo simulation is applied through the impulse response functions in the model. It shows how shocks to any one variable filter through the model can affect every other variable and eventually feed back to the original variable itself.
Monte Carlo  simulation is best employed through possible random movements in the model. This perfectly fits the scenario of Bitcoin. There are two components to a stock’s price movements: drift, which is a constant directional movement, and a random input, representing market volatility. By analyzing historical price data, the drift, standard deviation, variance and average price movement for a security is determined. These are the building blocks of a Monte Carlo simulation. The horizontal spool in Figure 7 delegates trace periods of the response function, and the vertical spool delegates responses of dependent variables to independent variables.
4. Bitcoin and the future economy
In an era where having a smart phone is highly more likely than having a Bank account, Bitcoin is here to stay. The architecture of money that we live in today brings the borrower and lender together through a financial intermediary, usually a Bank. One of the parties usually conforms to the rules and regulations put forth by the financial institution making it the most sought-after financial product the banks have to offer. People with limited education and a profile not matching to open a bank account can open a Bitcoin account in under 30 seconds.
Bitcoin is Gold 2.0 because Bitcoin is great as a store of value.
As of June 2017, the total value of all cryptocurrency in circulation is now  almost $100 bn.
This is almost double of what was at the beginning of this year. The value of the fiat currency issued by the Federal Reserve Bank of $1.4 trillion cannot be undermined, but an alternative is underway albeit faster than predicted. Cryptocurrencies are borderless, decentralized, and capable of replacing money in just about any transaction. Without any physical infrastructure, Bitcoin has paved its way into the world economy because of ease of use. The “no-strings” attached idea has appealed to the masses. It is positively one of the most innovative inventions ever since the Internet came. It is Internet money and a digital currency; to stop this, we would have to stop the Internet. This is the power of Bitcoin.
From pizza to Porsche, hotel bookings and even goat,  you can buy just about anything by using Bitcoin.
5. Blockchain, Bitcoin and the UAE
Bitcoin and blockchain technology are currently being used by different businesses and organizations. A peer-to-peer system, without the middlemen, where the buyer pays less and the seller receives more is a phenomenon the world is witnessing currently. Countries are passing policies for its free trade, while other countries like UAE and especially Dubai are adopting it as a part of their Smart Dubai 2020 initiative. Taking the possibilities to another level, the future of Bitcoin is evident from the establishment of a Global Block Chain Council under Dubai Government. It quotes: “As part of its efforts to adopt the latest technologies and innovation practices at the global level, Dubai Future Foundation has announced the establishment of the Global Blockchain Council to explore, discuss current and future applications, and organize transactions through the Blockchain platform. Blockchain records every transaction made by the digital currency Bitcoin” . Similarly, a UAE start-up has come out with a gold-backed cryptocurrency called one-gram, giving users, an asset-backed model of digital currencies. With the GCC accounting for a substantial proportion of global remittances, foreign exchange houses are big business, and many say incorporating Bitcoin-enabling technology would be commercially advantageous, as it would help them to cut costs and provide better services to customers . The volatility of Bitcoin is yet to be seen, as some analysts claim it to be a bubble, while others are cashing in on the cryptocurrency. The future where money may be limited to exchange of Bitcoins, the circulation of the Bitcoins remains to be seen once all 120 million Bitcoins are mined and circulated.