The dynamics of the bitcoin under a crisis context: insights from a two-regime switching model

Abstract

Purpose: in this paper, we analyze the cyclical components of Bitcoin dynamics using two-regime switching model. Discussion: virtual currencies based on asymmetric encryption technologies have been accepted by thousands of merchants and vendors, and the cryptocurrency market has seen enormous growth. Today, there are thousands of cryptocurrencies that are being traded on major cryptocurrency exchanges internationally. The price dynamics of virtual currencies includes features of both traditional financial instruments and currency assets. Results: this paper found that, regardless of the time intervals under consideration, there are two stable regimes in the dynamics of Bitcoin returns, corresponding to the states of “moderate” and “high” volatility. The Bitcoin market was in a state of moderate volatility most of the time in the period from 2014 to 2021. Event analysis showed that almost all major collapses in the cryptocurrency market occurred during periods when the market was in a moderate volatility state. The dollar index and the gold price make a significant contribution to the explanation of the regime change, the growth of which causes the transition to a moderate volatility mode.