Bitcoin Crash Simulation and Analysis

Transcription

1 Xu 1 Chunqi Xu (220000) Instructor: Dr. Martin A. Negro n ANLY R-2018/Spring 12 April 2018 Bitcoin Crash Simulation and Analysis A brief description of the event and objectives Bitcoin is a kind of cryptocurrency and payment system around the world. It is the first decentralized digital currency, and the system operates without any single administrator or central bank. As of February 2015, about one hundred thousand merchants accepted Bitcoin as payment. Research estimates that in 2017, there will be 2.9 to 5.8 million users using a cryptocurrency wallet, and most of them will use Bitcoin. As all cryptocurrencies, Bitcoin is subject to market fluctuations, where lies potential for large gains but also significant losses. Just a few years ago, the only people interested in Bitcoin were Computer Scientists. If you tried to talk to anyone else about cryptocurrencies, they would surely have had a very confused look on their faces. In recent years, the growth of Bitcoin, not only its market value growth, but also its popularity and general understanding by the wider community have been phenomenal. But going into 2018, Bitcoin's price has dropped significantly, from around $19,900 on 17th December 2017 right down to $8,036 on 4th February Each time Bitcoin's price crashes, there is a very real chance that it could mean the end of Bitcoin, regardless of what anyone says you need to be aware of this risk. After the slumps of January and February, it

2 Xu 2 seems that the first significant Bitcoin price crash has just arrived, taking the price well below the $10,000 mark that makes many people feel safe for the sixth time this year. So regardless of how many people say a current crash is the last, it might or might not be, and no-one really knows for sure. Risks associated with the event If Bitcoin crash happens, then some stocks of computer hardware companies will follow Bitcoin downward. If Bitcoin crash is so heavy that it influences the Cryptocurrency Ecosystem, then the prices of most cryptocurrencies will also decrease. If the economic conditions become bad, then the Bitcoin crash will be more likely to happen. Research Questions What s the percentage of some hardware company s stock price that is going to be decreased for after the Bitcoin crash? Will the Bitcoin crash when the economic conditions are good? Variables used for the model and how the values were determined To solve my research questions, I choose ten variables. 1. Bitcoin (BTC - USD) price The historical data of Bitcoin price

3 Xu 3 2. BTCS Inc (BTCS) stock price BTCS, Inc. (also called Bitcoin Shop, Inc.) is a publicly traded company based in the US, whose stated line of business is development of applications related to blockchain databases and digital currencies. 3. Bitcoin Services, Inc. (BTSC) stock price Bitcoin Services, Inc. engages in the Bitcoin and mining of other crypto currencies. The company offers Bitcoin escrow service and Bitcoin mining services in order to validate Bitcoin transactions and provide the requisite security for the public ledger of the Bitcoin network. It is also involved in the development and sale of blockchain software. 4. Litecoin (LTC - USD) price Litecoin is a peer-to-peer cryptocurrency and open source software project. Creation and transfer of coins are based on an open source cryptographic protocol and are not managed by any central authority. The coin was inspired by, and in technical details is nearly identical to, Bitcoin (BTC). 5. Overstock.com, Inc. (OSTK) stock price Overstock.com, Inc. is an American internet retailer. The company offers home and garden products, including furniture, garden, and other related products; jewelry and watches; clothing and accessories; electronics and computers; and other products and services. The company was introduced to blockchain technology in 2014 as the first major retailer to accept Bitcoin. 6. Microsoft Corporation (MSFT) stock price

4 Xu 4 Microsoft Corporation is an American multinational technology company. It develops, manufactures, licenses, supports and sells computer software, consumer electronics, personal computers, and services. The company announced that users can buy content with Bitcoin on Xbox and Windows store. 7. Expedia Group, Inc. (EXPE) stock price Expedia Group, Inc. is a global travel company. Its websites, which are primarily travel fare aggregators and travel metasearch engines, include Expedia.com, Hotels.com, Hotwire.com, CarRentals.com, trivago, Venere.com, Travelocity, Orbitz, and HomeAway. The company accepts Bitcoin for hotel bookings. 8. S&P 500 (^GSPC) historical data S&P 500 is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. It is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market, and a bellwether for the U.S. economy. 9. Gross Domestic Product (GDP) historical data Gross domestic product (GDP) is a monetary measure of the market value of all final goods and services produced in a period (quarterly or yearly) of time. 10. Unemployment Rate The unemployment rate is the share of the labor force that is jobless, expressed as a percentage. When the economy is in poor shape and jobs are scarce, the unemployment rate can be expected to rise. When the economy is growing at a healthy rate and jobs are relatively plentiful, it can be expected to fall.

5 Xu 5 The independent variables can be divided into four categories. 1) Computer company providing support for Bitcoin: BTCS Inc (BTCS) Bitcoin Services, Inc. (BTSC) 2) Other cryptocurrency Litecoin (LTC - USD) 3) Company accepting Bitcoin Overstock.com, Inc. (OSTK) Microsoft Corporation (MSFT) Expedia Group, Inc. (EXPE) 4) Economic condition S&P 500 (^GSPC) Gross Domestic Product (GDP) Unemployment Rate The process used to develop the model (simulation) Since the first stock price of Litecoin is on 10/23/2013, which is the latest of all variables, I choose the period range of the data set from 10/23/2013 to 3/29/2018. For Bitcoin and Litecoin, there are 1619 records, while for the stock price of BTCS Inc, Bitcoin Services, Inc., Overstock.com, Inc., Microsoft Corporation, Expedia Group, Inc. and S&P 500 index, there are only 1116 records. The reason is that Bitcoin and other cryptocurrency like Litecoin are traded via online platforms, so we can have their daily prices, including Saturday and Sunday.

6 Xu 6 However, the stocks of other companies are traded through stock exchanges, which are closed at weekend. In addition, the stock price of Bitcoin Services, Inc. is incomplete, with some missing data. To make up the differences in record number of variables and the missing data, the method of simulation is necessary to develop the model. For BTCS Inc, its stock price covers six years, from 2013 to Firstly, I calculate the mean and standard deviation of its adjusted close stock price (adjusted for both dividends and splits) for every year.

7 Xu 7 I assume that the daily stock price of BTCS Inc is normally distributed. Then I simulate its daily stock price with the mean and standard deviation calculated, including Saturday and Sunday in 2013, 2014, 2015, 2016, 2017, and 2018 respectively. Since the simulated results will change every time we click on the Excel, I copy the simulated results and paste them as values into the next column. Because the normal distribution is symmetrical, I get some negative values from simulation. However, we will never have a negative stock price. To solve this problem, I use another function to make all the simulation values positive.

8 Xu 8 When the value in column O is positive, I will use that value; when the value in column O is not positive, I will use the mean value of that year instead. I use the same simulation method and get daily stock price of Bitcoin Services, Inc., Overstock.com, Inc., Microsoft Corporation, Expedia Group, Inc. and indexes of S&P 500 from 2013 to For GDP, there is a little difference because I can only get the yearly data. So I divide the yearly GDP by 360 to get the daily mean value of every year and set the standard deviation to be 1. The following steps are the same with stock price. Although I only get the monthly data of unemployment rate, I calculate the mean and standard deviation of monthly data for every year and do the simulation as for stock price, because the unemployment rate is not cumulative.

9 Xu 9 At last, I get the 10 variables with the same number of records. Findings description After the simulation, I perform the regression analysis to find out the relationship between the price of Bitcoin and the other independent variables.

10 Xu 10 The Multiple R, which is the correlation coefficient, tells us how strong the linear relationship is. According to the regression result, the Multiple R is 0.968, meaning a strong positive relationship. Since there is more than one independent variable, I use Adjusted R Square instead of R Square, which adjusts for the number of terms in the model. The Adjusted R Square is in this model, indicating that the model explains more than 90% variability of the dependent data around its mean. In other words, more than 90% of the values fit the model. According to the third table, the linear regression equation of the model is BTC-USD = *BTCS *BTSC *LTC-USD *OSTK * MSFT *EXPE *^GSPC *GDP (M$) *UNEMPLOYMENT The p-value in the third table for each variable tests the null hypothesis that the coefficient is zero. We can reject the null hypothesis if the p-value is less than That is, an independent variable with a low p-value is likely to be a term can be kept in the model because the changes in that independent variable are meaningful to the changes in the dependent variable. The p- value for Bitcoin Services, Inc. (BTSC), Microsoft Corporation (MSFT) and S&P 500 (^GSPC) are greater than the alpha level of 0.05, indicating that they are not statistically significant and can be removed from the model. So I do the regression analysis again without these three variables and the new linear regression equation is: BTC-USD = *BTCS *LTC-USD 14.07*OSTK *EXPE *GDP (M$) *UNEMPLOYMENT

11 Xu 11 The table shows that there is a strong positive relationship between the price of Bitcoin and independent variables, and most of the values fit the model. Findings analysis and research questions answer 1. What s the percentage of some hardware company s stock price that is going to be decreased for after the Bitcoin crash? To answer this question, I keep the value of independent variables constant and use the 2018 mean value of them, except BTCS Inc (BTCS). Since market crashes are generally defined by an abrupt and rapid decline of 20% or more, I define the Bitcoin crash as that the price of Bitcoin declines by 20% comparing to its average value in 2018, which will be *(1 20%) = Substitute the values into the model, we can get that = *BTCS * * * * *4.1 Then,

12 Xu 12 BTCS = It seems that after Bitcoin crash, the stock price of BTCS Inc (BTCS) will be However, as we all know, the stock price will never be negative. So we can say that after the Bitcoin crash, the stock price of some hardware company will decrease dramatically. 2. Will the Bitcoin crash when the economic conditions are good? Now there are only two variables in the model indicating economic conditions, one is GDP, and another is unemployment rate. The healthy GDP growth rate is one that is sustainable so that the economy stays in the expansion phase of the business cycle as long as possible. The ideal GDP growth is between 2-3 percent, and the natural rate of unemployment will be between 4.7 percent and 5.8 percent. I choose 2.5% as GDP growth rate and 5.25% as unemployment rate in good economic conditions, so the GDP will be *(1+2.5%) = Then I substitute the 2018 mean values of other variables into the model and get that, BTC-USD = * * * * * *5.25 So BTC-USD = It looks like that Bitcoin will not crash when the economic conditions are good.