What do cross-country Bitcoin holdings tell us? Monetary and institutional discontent vs financial development


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Cryptocurrencies show tremendous growth by market capitalization, however Bitcoin cross-country holdings are still in question. The purpose of the paper is to show that inflation discontent with the rule of law failures can explain why residents of different countries are prone to cryptocurrency holdings. The level of financial development is also considered. A hypothesis is proposed for more complex and segmented motives of Bitcoin holdings, tested by the OLS method. Single- and multi-factor regressions with independent variables are used, which can validate cross-country Bitcoin holdings in terms of inflation discontent, quality of institutions and financial development. Regression results confirm the idea of more segmented motives to hold Bitcoins. First, the hedge against inflation motive is rooted in the institutional weakness of central banks, and the regression results show that inflation variables are the most significant. Second, the hedge against institutional risks of asset ownership motive, based on the lack of rule of law and the relevant variable, is best performing among other institutional variables. Third, it is wrong to neglect financial development. However, it only plays a role in interaction with better innovation performance, meaning that crypto investors try not only to diversify their portfolios, but also to profit from involving in a sector with promising technological perspectives. The main takeaway is that institutional factors help explain why people in countries with worsened inflation and institutional performance tend to hold a large fraction of Bitcoins in assets. Obviously, monetary and institutional fragility is underestimated in the general discussion about the nature of digital money.

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    • Figure 1. Market capitalization for cryptoassets, USD bln
    • Figure 2. Bitcoin and US interest rates
    • Figure 3. Gold and Bitcoin pricing
    • Figure 4. Commodity price index and Bitcoin
    • Figure 5. Risk-adjusted returns
    • Table 1. Single-factor regression analysis results
    • Table 2. Multi-factor regression analysis results
    • Conceptualization
      Viktor Koziuk
    • Data curation
      Viktor Koziuk
    • Formal Analysis
      Viktor Koziuk
    • Funding acquisition
      Viktor Koziuk
    • Investigation
      Viktor Koziuk
    • Methodology
      Viktor Koziuk
    • Project administration
      Viktor Koziuk
    • Resources
      Viktor Koziuk
    • Writing – original draft
      Viktor Koziuk
    • Writing – review & editing
      Viktor Koziuk