Short- and Long-Term Interactions Between Bitcoin and Economic Variables: Evidence from the US

Bitcoin's growing use as a financial asset and transaction instrument has economic and monetary effects. In this paper, we examine the short- and long-term interactions between Bitcoin prices and the money supply, consumer price index (CPI), and economic policy uncertainty (EPU) in the US. Using monthly data covering the period July 31, 2010 to August 31 2020, we employ continuous wavelet transforms, wavelet coherence, wavelet-based vector autoregressive Granger causality test, and nonlinear causality test. The results indicate that Bitcoin prices affect money supply and share dynamic inter-shock with CPI, EPU, and money supply. Specifically, the money supply and EPU negatively affect Bitcoin prices. CPI positively affects Bitcoin prices in the short-term, which supports the role of Bitcoin as a hedging asset. A bidirectional volatility transmission exists between Bitcoin prices and each of money supply, CPI, and EPU. Moreover, nonlinear causality test results show a bidirectional causality from Bitcoin price to money supply across all dimensions and a significant causality with CPI and EPU. The findings matter to investors seeking to refine their investment decisions while considering the effect of economic factors and to policymakers and central banks seeking to formulate policy tools using Bitcoin.