EFFECT OF THE BITCOIN ON THE EXCHANGE RATE OF SRI LANKA: ARDL APPROACH

Abstract

This article examines the effect of the bitcoin cryptocurrency on the exchange rate in Sri Lanka. It attempts to identify the long-run and short-run relationship between bitcoin and the exchange rate and find the macroeconomic factors which determine the exchange rate. This study uses the exchange rate as a dependent variable while bitcoin, consumer price index, broad money, and remittance are independent variables. Monthly time series data set was used from January 2015 to August 2021. Outputs are carried from E-Views10. The Autoregressive-Distributed Lag model has been used to analyze the objectives. All variables transformed to the natural logarithm. According to the ADF test, the natural logarithm of remittance is stationary at level (I(0)), and other variables are stationary at the first difference (I(1)). ARDL (2 3 2 3 2) is the best lag model. The estimation findings expose that bitcoin price volatility has a long-run and short-run negative impact on the exchange rate. The consumer price index and broad money positively impact the exchange rate in the short run. The ECT (-1) coefficient is -0.265738, statistically significant at the 1% level. The estimated coefficient indicates that about 26% of this disequilibrium is corrected within 1 month. When price volatility rises, investors will move away from bitcoin investments to other ones. Due to the high level of risk associated with investing in virtual currency, people are more likely to invest in real money, which will increase the value of their local currency.