Cryptocurrency Shock and Exchange Rate Behaviour in Nigeria

Abstract:

This study examined the relationship between cryptocurrency shocks and exchange rate behaviour in Nigeria. Selected cryptocurrencies for the study are Bitcoin, Ethereum, Litecoin, Ripple and Binance coin which are the most traded cryptocurrencies in Nigeria. Augmented Dickey-Fuller (ADF), Johansen Cointegration and Vector Autoregressive (VAR) tests were used to analyze the monthly data of exchange rate and selected cryptocurrencies for four years (45 months). The result of the cointegration test revealed the existence of a long-run relationship among the variables. ECM result showed that about 6% of the short-run disequilibrium are being corrected and integrated into the long-run equilibrium relationship. In addition, the Variance Decomposition result showed that Ripple has the highest variations to exchange rate in the short and long runs. The present value of exchange rate adjusts slightly to changes in cryptocurrency. Ripple and Bitcoin have the highest shocks on the exchange rate. Therefore, monetary authorities should give adequate attention to cryptocurrency transactions and make policy decisions on how to reduce the prevailing high exchange rate in Nigeria by integrating crypto transactions in their systems. Transaction in cryptocurrency is still at the early stage, especially in Nigeria; only five years data can be gotten on commonly traded cryptocurrencies in Nigeria. This is a limitation to the study in terms of the number of cryptocurrencies used in the study. More cryptocurrencies can be included in future studies.