Bitcoin in China

Abstract

The aim of this study is to investigate and show how the Chinese stock market affects bidirectional or unidirectional the Cryptocurrency market and in particular, Bitcoin. To carry this project, we have retrieved daily historical daily data for BTC / CNY from Bitcoinity and DataStream databases. Using the ban of the bitcoin in China on October of 2017 as a possibly exogenous shock to the Bitcoin market (Event 1) we examine the relationship between the stock market and the bitcoin market in China and US before and after this event. Before the event, the Chinese stock market and specifically Shanghai Index returns Granger cause BTC / CNY returns. In addition, in the US market we do not observe any association BTC / USD to US stock market. But after the event took place, we observe a unidirectional association from BTC / USD to US stock market. Additionally, we examine the relationship between arbitrage and bitcoin bid-ask spreads before and after the People's Bank of China applied fixed trading transactions of 0.2% per trade (Event 2). Before this event, analysis suggests a unidirectional positive relationship between bid-ask spreads in US and the arbitrage. Post this event we find a unidirectional positive relationship of bid-ask spreads in China and arbitrage. Theoretical literature supports these event changes that we find.