INTERNATIONAL JOURNAL OF SCIENTIFIC & TECHNOLOGY RESEARCH VOLUME 9, ISSUE 02, FEBRUARY 2020 ISSN 2277-8616

Empirical Test For The Relationship Between

The Bitcoin Using Historical Data With (Inflation
Rate, Foreign Trade And GDP) And The
Possibility To Use The Bitcoin As Hedge Against
Inflation: Evidence From GCC Countries
Anas Al.Qudah, Myriam Aloulou
Abstract: the aim of this paper is to examine the empirical relationship of Bitcoin prices with the inflation rate, foreign trade and Gross Domestic Product
(GDP) per capita in GCC countries (Bahrain, Kuwait, Oman, Saudi Arabia, and the United Arab Emirates). To explore this issue, we selected a study
period of nine years (2009-2017) and we used the correlation between each of (GDP per capita, foreign trade and Inflation) and (the Bitcoin's Prices).
The empirical result obtained using simple regression indicates a negative and significant relationship between the bitcoin price and the inflation rate in
GCC countries. Based on this result we suggest a model to hedge against inflation in the GCC countries using the bitcoin returns.

Index Terms: GDP per Capita, Inflation rate, foreign trade, Bitcoin, hedging Portfolio, Crypto-currency
————————————————————

1 INTRODUCTION
In simple form, purchasing power parity (PPPs) is relative
prices, which show the proportion of the prices in national
currency to same services & goods in many countries. And
from the most important examples in the economics literatures
in this regard is the BigMacCurrency index it is well known as
burgernomics (OECD, benchmark results, 2002), whereby the
BigMac PPP is the conversion rate that would mean
hamburgers cost the same in USA as abroad. The significant
question in this regard that we can derive from the previous
words is how should measures of Gross Domestic Product
(GDP) which be converted into a common unit like the
burgernomics did before, but the researchers found that the
market exchange rates will be an unsatisfactory solution for
many purposes because the exchange rates will reflect so
many influences than the direct price comparisons that are
required to make volume comparisons. Figure 1 below shows Based on the above; the researchers will try in this article to
the size of economies as a percentage share of total GDP for study a new relationship between the economic variables did
selected countries. Figure 1.The Size of economies: not mentioned in economics researches previously, which is
Percentage share of total OECD GDP, 1999, selected mean addressing new model between existing variables to get
countries. out results and recommendations in this regard, and the main
variables that the researchers trying to test it are the: GDP per
capita, inflation Rate and foreign trade and they take also the
___________________________________ Bitcoin currency as a new kind of money has a broad impact in
the fields of economics.
• Author: Dr. Anas Al.Qudah, Assistant Professor, Emirates
College of Technology, Finance and Banking, College of 2 THE STUDY OBJECTIVE
Business & IT, Email: [email protected], Abu Dhabi, In this study the researchers will try to find the correlation
UAE, P O Box: 41009 between the Bitcoin Prices and some Macroeconomics
• Co- Author: Dr. Myriam Aloulou, Assistant Professor, Emirates variables like GDP per capita, foreign trade and inflation rate in
College of Technology, Finance and Banking, College of GCC countries, and they want to investigate the effect of
Business & IT, Email: [email protected], Abu Dhabi, extension use of Bitcoin on these variables mentioned before.
UAE, P O Box: 41009 They will use for this purpose Statistical Package for the Social
Sciences (SPSS) to find the correlation between them. And
they will review the previous literatures in this regard to find
the range they are consistent with these previous studies, and
the possibility to use the results that will be founded in the
hedging purposes against future inflation risks

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trade data which are publicly available. They showed also how
3 LITERATURE REVIEW the bitcoin exchanges contribute to price discovery.
There are several areas of interest by researchers in regards
of Bitcoin. Yarmouk (2013) studied its economic situation as a 4 THE STUDY METHOD
money or currency. Ciaian et al (2014) explained the bitcoin
exchange prices. Eric Lockard, the Corporate Vice President TABLE 1
of Universal Store in Microsoft company considered that the REVIEW OF THE EMPIRICAL LITERATURE
digital currencies like Bitcoin is growing beyond early time
enthusiasts, and he expected the continuity of its growth,
which allows people to use the digital currencies like Bitcoin to
buy their goods and services, and this kind of commercial
action will allow to Microsoft to be at the front edge of that
trend. XinLi, Chong Alex Wang (2016), found the bitcoin
exchange rate is affected by the state of economy and the
conditions of the market. Joseph D. Alba, David H. Papell
(2005) found considerable evidence of Purchasing Power
Parity in the countries which have good commerce, lower rate
of inflation and stable nominal exchange rate, and they have
close level of development then US Their results
demonstrated that the features of each country justify the
adherence to and deviations from long term purchasing power
parity. Jim Lothian (2016), found that the purchasing power
parity affected the price level based on the change of the
monetary arrangement. He concludes that there is a
correlation between inflation rate, the exchange rate changes
and the varied monetary regimes that prevailed. Stephanie
Kremer, Alexander Bick, Dieter Nautz (2014) confirmed by
using the panel method that in the developed country having a
good economic growth, the inflation rate is very low,
conversely to the non-industrialized countries with lower
economic growth and high rate of inflation. Barro (1995)
believed that there is a causal influence between inflation and In order to achieve the purpose of this study, it will use the
economic growth. He estimated that the rate of inflation affects correlation between each of (GDP per capita, Inflation rate and
negatively the real gross domestic products in the long run foreign trade) and (the Bitcoin) in the other side, so the study it
which justify the importance of keeping the prices stable. will be in three sections: The first section: correlation between
Sandeep Mazumder (2016) found that the benefit of an Bitcoin and GDP per capita in GCC countries. In the second
accelerated inflation occurs in the countries with low Gross section: correlation between Bitcoin and Inflation Rates in
Domestic product. But those with high GDP shouldn‘t expect GCC countries. And in the third section: correlation between
output gain from an increase in price level. The use of Bitcoin bitcoin and foreign trade. Figure 2 below shows the sections of
didn‘t cause inflation. It controls and limits the velocity of the study:
money supply which reduces inflation (Burghelea, 2008).
Pavel Ciaian, Miroslava Rajcaniova & d‘Artis Kancs (2015)
confirmed that there is positive and significant relationship
between the supply and demand of bitcoin and its price. Philip
Inyeob Ji, Kwang Myung Chun (2016) found a significant and
large positive relationship between bitcoin returns and
inflation for many countries providing major Bitcoin trading
currencies, including Australia, China, and the United
Kingdom. They concluded that Bitcoin may have the potential
to be an inflation hedge in a limited group of countries. Anna
Loseva (2016) found that the Bitcoin has a positive effect on
the money stock and a negative one on inflation and the
supply of money. In fact, the more the number of bitcoin in the
economy, the slower is the inflation. Pal Boug et al (2010),
showed that in each of the 13 less developed countries. A rise
in the incertainty and volatility of the real exchange rate in the
short run and long run has a significant negative effect on
foreign trade. Morten Brandvold, Peter Molnár, Kristian Where;
Vagstad, Ole Christian and Andreas Valstad (2015) considered - Bitcoin (BTC): Digital Currency created
that Bitcoin as a payment system and open source peer-to- and held electronically using software.
peer electronic money is one of the market leaders with very - GDP: Gross Domestic Product per capita.
high information share. It is traded at frequent exchanges and - Inf.R: Inflation Rate.

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- F.T: Foreign Trade 5.2 Inflation rate

- Correlation coefficient formulas are used to find how strong Inflation is the percentage change in the value of Price level
a relationship is between data. The formulas return a value from one year to the next. It measures the variation in the
between -1 and 1, where: 1 indicates a strong positive prices of a basket of goods and services for a year.
relationship. -1 indicates a strong negative relationship.
The inflation rate = CPIX+1 - CPIX / CPIX (2)
From the Figure (2) above, the researchers create three main
hypotheses to test the correlation as the following table shows Where; CPI: Initial Consumer Price index (Changes in the CPI
are used to assess price changes associated with the cost of
TABLE 2 living; the CPI is one of the most frequently used statistics for
THE STUDY HYPOTHESES identifying periods of inflation or deflation (Ball, Laurence M.,
and N. Gregory Mankiw.1992))

6 EMPIRICAL TEST
6.1 The 1st section: Correlation between Bitcoin and the
Gross Domestic Product (GDP per capita) in GCC
countries
Depend on the data published at the official site: economics
trading (GCC countries | Economic Indicators) GDP per capita
in GCC countries (Gulf Cooperation Council) has been
recorded as the following in the end of fiscal year 2017, when
Where; modified by purchasing power parity (PPPs).
- H01: there is no correlation between Bitcoin Prices
and GDP per capita in GCC countries. TABLE 3
- H02: there is no correlation between Bitcoin Prices GDP PER CAPITA IN GCC COUNTRIES CALCULATED BY
and Inflation Rate GCC countries. U.S DOLLARS (BILLIONS)*
- H03: there is no correlation between Bitcoin Prices
and Foreign Trade in GCC countries.

5 THE STUDY VARIABLES

5.1 GDP per capita
Amadeo (2017) defined Real Gross Domestic Product per
capita as the amount of all goods and services produced
divided by the total population and adjusted for inflation, the
RGDP allowed the comparison between the standards of living
of different countries. This economic indicator presented three
concepts. The first one is GDP ―gross domestic product.‖ It is
the sum of personal consumption (C), business investment (I),
government expenditure (G) and net export (X-M). The second
is RGDP ―Real Gross Domestic Product‖ valued at constant
prices. Real GDP reveals the amount of economic growth. In
fact, it differs from the nominal GDP which is valued at the And it is significant in this regard to mention that we translated
prices that prevailed in that same year. Nominal GDP reveals the numbers from this site by US dollar, because all trading
the amount of inflation. The third concept is ―per capita,‖ that transactions that happened by the Bitcoin were in the same
means ―per person.‖. It is obtained by dividing the Real Gross currency (USD). And the figure below shows the GDP per
Domestic Product by the population. This is the most accurate capita in GCC countries the last ten years.
measurement to compare economic indicators like GDP for
countries having big differences in population sizes.

GDP per capita= R/P (1)

Where;
P: population
R: real GDP, R = C+I+G+(X-M),
C: consumption,
I: investment,
G: government expenditure,
(X-M) = net exports.

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USD.
TABLE 5
BITCOIN TRADING PRICES 2017*

On the other side we found the Historical Bitcoin Price for the
study period (2010-2017) and the following table and chart
show the closing prices for bitcoin, and any economist can see
the differences between the periods down, where the bitcoin According to the Study Objectives, the Data needed to test
price was register the highest level at the end of (2014, 2016) Correlation using SPSS should be the data mentioned in table
respectively, it reached to (770 USD and 990 USD) for each 3 and table 4 which include the GDP per capita & bitcoin
unit. But it started trading at (0.06 USD) at the beginning of prices for the period 2009 until 2017 in GCC countries.
2010 as shown in the figure below:
6.1.1 The result of correlation test between the GDP per
Capita in GCC & bitcoin prices for the period 2009 until
2017:
The table below (6) shows the result of correlation test
between the GDP per capita in GCC & bitcoin prices depend
on Pearson, Spearman's Rho and Kendall's rank respectively:

TABLE 6
THE RESULT OF CORRELATION TEST BETWEEN THE
GDP IN GCC & BITCOIN PRICES FOR THE PERIOD 2009
UNTIL 2017

The table below shows the closing price for Bitcoin Currency in
the last 9 Years which is considered as the study period:

TABLE 4
BITCOIN CLOSING PRICES AT THE END OF 2017
Pearson correlation coefficient is the most commonly used
method, although it is very sensitive to outliers. Spearman and
Kendall correlation coefficients are not sensitive to outliers but
their explanatory power is lower. From table above; A
Pearson‗s rank-order correlation was run to define the
relationship between 9 years GDP per capita and Bitcon
Prices in GCC countries. The numbers above (rs (9) = 0. 1129,
p = 0.77). And from the table above; the Spearman's rank-
order correlation was run to determine the relationship
between 9 years GDP per capita and Bitcon Prices in GCC
countries. There was a (rs (9) = 0. 4333, p = 0.2499). Also a
We believe in this regard that the bitcoin will continue in Kendall's rank-order correlation was run to determine the
volatility behavior in the next few years, because many relationship between the same 9 years GDP per capita and
countries are moving towards electronic commerce today, and Bitcon Prices in GCC countries. There was a (rs (9) = 0. 3333,
this is significant reason to push up the bitcoin prices in the p = 0. 2595). Depend on the table above; the researchers
future, and here we are not talking about the using bitcoin cannot accept that there is a relationship between GDP per
safely, but we looking to the bitcoin from the economist eye of Capita in GCC countries and the Bitcoin Prices. It is clear that
view, actually the trading price for this coin reached in June the R-score was very low and the P-value was very high.
2017 more than (2300 USD) for each unit. And table below
shows sample from trading prices for the Bitcon currency by 6.2 The 2nd section: Correlation between Bitcoin and the
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Inflation Rate in GCC countries and Bitcon Prices in GCC countries. The numbers above
shows it is a strong relationship and Negative correlation
Depend on the data published at the official site: economics between Inflation Rate and Bitcon Price, which was statistically
trading (GCC countries | Economic Indicators) Inflation Rate in significant (rs (9) = - 0.724, p = 0.02). And from the table
GCC countries (Gulf Cooperation Council) has been recorded above; the Spearman's rank-order correlation was run to
as the following in the end of fiscal year 2017: determine the relationship between 9 years Inflation Rate and
Bitcon Prices in GCC countries. There was a strong, Negative
TABLE 7 correlation between Inflation rate and Bitcon Prices, which was
THE INFLATION RATE IN GCC COUNTRIES CALCULATED statistically significant (rs (9) = - 0.803, p = 0.0091). Also a
(%)* Kendall's rank-order correlation was run to determine the
relationship between the same 9 years Inflation Rate and
Bitcon Prices in GCC countries. There was a strong, Negative
correlation between Inflation Rate and Bitcon Prices, which
was statistically significant (rs (9) = - 0.7043, p = 0.0088).
Depend on the table above; we can accept that there is a
negative relationship between Inflation Rate in GCC countries
and the Bitcoin Prices. It is clear that the R-score was high
and the P-value was very small especially in the Spearman's
Rho Correlation.

6.2.2 The possibility to use the Bitcoin as hedge against

inflation:
Depend on the results that mentioned in table (8) we
suggested to make inflation hedge. As known the inflation
hedge is a process that is considered to provide some
The figure below also shows the Inflation Rate in GCC protection against the reduced purchasing power of any
countries the last ten years. currency that results from the reducing of its value due to
increasing prices. Using a Valuation Approach to Currency
Hedging (Hazuka and Huberts, 1994), the researchers
formulated the following approach to evaluate the value of the
currency future contracts:
F [St] = S0 × E [(1+ Id) t / (1+ R Bitcoin) t] (3)
Where,
R Bitcoin: Bitcoin Return
F [St]: The Exchange rate at time t in base currency per
bitcoin.
S0: The Spot Price at time Zero
Id: Domestic Rate of Inflation (each country alone in
GCC: I KSA, I UAE, I Oman, I Bahrain, I Kuwait)

In the regard of Bitcoin Return it is available and published

6.2.1 The result of correlation test between the Inflation online[Historical Data (Block-Alive)] and the table (9) below
Rate in GCC & bitcoin prices for the period 2009 until 2017 shows sample including the return for two and half years:
The table below (NO.8) shows the result of correlation test
between the Inflation Rate in GCC & bitcoin prices depend on TABLE 9
Pearson, Spearman's Rho and Kendall's rank respectively: BITCOIN HISTORICAL RETURNS

TABLE 8
THE RESULT OF CORRELATION TEST BETWEEN THE
INFLATION RATE IN GCC & BITCOIN PRICES FOR THE
PERIOD 2009 UNTIL 2017

From table above; A Pearson‗s rank-order correlation was run

to determine the relationship between 9 years Inflation Rate We suggest Each country in GCC need to make the hedging
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portfolio separately which means KSA will make hedging put option for short position or sell future contract under the
portfolio in isolation from UAE and Oman will make a hedge amount that calculated in the table (11) which shows F [St] for
portfolio in isolation from Kuwait...etc.The value of the hedge each country. The value for the hedging portfolio (V) for the
portfolio is the value of money that the country can obtain by (Dec 2018 – Jan 2019) for the countries in GCC will be as the
liquidation the portfolio when the future contracts expires, and following:
it will be calculated depend on the value of the hedge portfolio TABLE 12
(Chance, Brooks, 2008) that equal: V= h×S0 -F(St). It is THE VALUE FOR THE HEDGING PORTFOLIO (V) FOR :(
reasonable to assume that the hedge rate (h) is the same as DEC 2018 – JAN 2019)
the correlation between the Inflation rate in each country in
GCC and the Bitcoin price. And the following model will
calculate the value of hedging portfolio to hedge against the
Inflation:

V= h × S0 - F (St) (4)

Where,
V: The value of the hedging portfolio. Inflation rate parity (the relationship between the future contract
F [St]: The Price of future contracts (same: Exchange and the spot exchange rate that was calculated above depend
rate at time t in base currency per bitcoin) on the inflation rate & the return in bitcoin) is an important
S0: The Spot Price at time Zero (current time) fundamental relationship between the spot & future exchange
h: Hedging ratio [correlation. Normally in options rate and the inflation rate in two different currencies. It is the
portfolios will be: (Cu-Cd / Us- Ds)] foreign currency market‘s version of the carry arbitrage future
pricing model. A helpful way to understand Inflation rate parity is
As a fact for the single correlation between the inflation rate in to consider the position of country which believes that a higher
each country in GCC and the Bitcoin price for the same period inflation rate can be compensated by converting to a currency
(2009-2017), the above model was suggested by researchers that pays high return. And we have to remember in this regard
before; can be applied in the future market by using the that the future contracts or the option (Put, Call) there are no
inflation rate & the bitcoin return and then we can make the one is forced to execute the contracts or agreements.
valuation for each hedging portfolio. The table below shows
the correlation between inflation rate and the bitcoin price in 6.3 The 3rd section: Correlation between Bitcoin and the
each country in GCC: Foreign Trade in GCC countries
Depend on the data published at the official site: economics
TABLE 10 trading (GCC countries | Economic Indicators) FT in GCC
THE CORRELATION BETWEEN INFLATION RATE & countries (Gulf Cooperation Council) has been recorded as
BITCOIN PRICE IN EACH COUNTRY IN GCC the following in the end of fiscal year 2017:

TABLE 13
FT IN GCC COUNTRIES CALCULATED BY U.S DOLLARS
(BILLIONS)*

By using the correlation as a hedging ratio and the historical

return for the bitcoin currency trading and the inflation rate for
each country, the monthly F(St) or monthly currency future
contracts for December 2018 to be exercised in January 2019
will be as the following:

TABLE 11
MONTHLY F(ST) OR MONTHLY CURRENCY FUTURE
CONTRACTS FOR DECEMBER 2018 TO BE EXERCISED
IN JANUARY 2019

And the figure below shows the Foreign Trade in GCC countries
the last ten years:

When we want to evaluate the hedging portfolio for each

country we will consider the correlation to be the hedging ratio,
and we will ignore the minus sign because we should to buy
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TABLE 15
THE HYPOTHESES TEST RESULTS

6.3.1 The result of correlation test between Foreign Trade

in GCC & bitcoin prices for the period 2009 until 2017:
The table below (14) shows the result of correlation test
between the FT in GCC & bitcoin prices depend on Pearson,
Spearman's Rho and Kendall's rank respectively As mentioned before, in the literature review that Bitcoin could
boost Japan's GDP, (Nomura analysts, 2018) Yoshiyuki
TABLE 14 Suimon and Kazuki Miyamoto (2018) estimate the wealth
THE RESULT OF CORRELATION TEST BETWEEN THE FT effect of bitcoin could boost consumer spending in Japan to as
IN GCC & BITCOIN PRICES FOR THE PERIOD 2009 UNTIL much as 96 billion yen ($855.4 million). But it is good to
2017 mention that by Assuming the Japanese hold about 3.7 million
bitcoins and estimating an 866,000 yen ($7,716) gain in price
between the second and fourth quarters of the year, they
estimate unrealized gains on Bitcoin held by Japanese people
of roughly ¥3.2 trillion ($28.5 billion), (Source: Crypto
Compare, 2018). But we found that there is no relationship
between GDP per capita and Bitcoin Price in GCC countries
which means the result in this regard was unlike expected. We
believe that this digital currency needs legal cover in the GCC
countries as what happened in Canada; Maria Santos (2018),
The From table above; A Pearson‗s rank-order correlation was
With Ottawa already equipped with a new Bitcoin Automated
run to define the relationship between 9 years Foreign Trade
Teller Machine. Basically this is a machine that accepts fiat
and Bitcon Prices in GCC countries. The numbers above (rs (9)
money and dispenses Bitcoin in exchange. From Canada
= -0. 3341, p = 0. 3795). And from the table above; the
turns into the country with most Bitcoin ATMs despite
Spearman's rank-order correlation was run to determine the
government's opinion. David George-Cosh (2014) Canada
relationship between 9 years Foreign Trade and Bitcon Prices in
Says Bitcoin Isn‘t Legal Tender (the Wall Street Journal).
GCC countries. There was a (rs (9) = 0. 3333, p = -0. 3853).
Joseph D. Alba, David H. Papell (2005) found considerable
Also a Kendall's rank-order correlation was run to determine the
evidence of Purchasing Power Parity that calculated depend
relationship between the same 9 years Foreign Trade and
on GDP per Capita in the countries which have good
Bitcon Prices in GCC countries. There was a (rs (9) = -0. 1667,
commerce, we believe that there results regarding GDP per
p = 0. 6122). Depend on the table above; the researchers
capita and Bitcoin prices they were against with Joseph D.
cannot accept that there is a relationship between Foreign
Alba, David H. Papell‘s results, in case we consider the bitcoin
Trade in GCC countries and the Bitcoin Prices. It is clear that
a kind of currency, and GCC one of the most important
the R-score was very low and the P-value was very high.
countries which used to the E-Commerce. Anna Loseva
(2016) found that by increasing the number of Bitcoin in
7 RESULTS & DISCUSSION circulation inflation slows down and if the number of Bitcoin in
At the end of this study; we found three main results, the first circulation increases by 1% the growth rate of price level in
one that there is no relationship or significant correlation month reduced by 0.241%. This result was compatible with the
between GDP per capita and Bitcon Prices in each of Pearson, result of our study result, as mentioned in the 2nd hypothesis,
Kendall and Spearman's tests in GCC countries. And in the which means when the number of Bitcoin and the price of it go
second result they found there is a strong relationship and up, the inflation rate will go down. In the same time
negative correlation between Inflation Rate and Bitcoin Prices in Burghelea‘s study (2008) he found that the use of Bitcoin
each of Pearson, Kendall and Spearman's tests also in GCC didn‘t cause inflation or in other language there is no
countries, but in the third result they found that there is no relationship between Bitcoin and Inflation rate. And this is the
correlation between foreign trade and Bitcoin Prices, in all the most interested result in this regard, because the researchers
tests (Pearson, Kendall and Spearman) combined. Based on found that there is a strong relationship between Bitcoin and
the results above we accepted the second hypothesis but they inflation, which means the Inflation rate and Bitcoin they have
rejected the first and the third one as mentioned in the table no harmonious all the time. In other words, it‘s hard for them
below: to go the same direction from the Statistics point of view, so
the strong relationship that we found in this study completely
against the Burghelea‘s results. Researchers believe that this
digital currency was so young in 2008 when Burghelea‘s
(2008) was published his results, because the Bitcoin in that
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time was very small index price not more than 1 USD as a result we found that a negative strong relationship between
price for each unit. In the Barro (1995) study he found that Inflation Rate and Bitcoin Prices in each of Pearson, Kendall
there is a causal influence between inflation and economic and Spearman's tests also in GCC countries, but in the third
growth and estimated that the rate of inflation affects result we found that there was no correlation between foreign
negatively the real gross domestic products, we believe that trade and Bitcoin Prices. And we used the negative relationship
there results regarding GDP per capita and inflation they were between the inflation rate & the bitcoin price to introduce a new
consistent with Barro‘s study, because when they test the GDP model that can be used to make hedging strategy against the
& Inflation rate with same dependent variable they found they inflation in GCC countries.
are opposite. This study came to add new variables to Pavel
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