How trading in cryptocurrency impacts stock markets of Gulf monarchies


It may seem to any observer that cryptocurrency is the number one hot topic in business, economy and policy making circles for the past few years. Having attracted substantial interest and seeing a dramatic rise in market value, particularly since the onset of Covid-19, cryptocurrencies like Bitcoin & Ethereum have captured the world’s attention, however also causing alarm in central banks around the world for their anti-regulatory nature.

One region of the world where cryptocurrencies were fought against with strict regulations is the Middle East. Egypt, for example, has banned the use and trade in cryptocurrency, or even promoting them, as per a 2020 law issued in the country. The nearby Gulf region, which includes economic powerhouses the likes of Saudi Arabia, UAE, Qatar, Kuwait, Bahrain and Oman, have enacted similar measures to curb the use of cryptocurrency with varying degrees of success.

All these measures, however, haven’t managed to fully eliminate the cryptocurrency trading market in these economically significant monarchies. A pioneering paper by researchers from the AUC School of Business;Mina Sami, assistant professor of economics, and Wael Abdallah, assistant professor of finance, digs into the economic impact of trading in cryptocurrency trading on the stock markets of the gulf region – shedding light on how they influence, and even act as substitutes, to the region’s stock market.

The paper, titled “Cryptocurrency and Stock Markets : Complements or Substitutes? Evidence from Gulf countries” has recently been ranked among the top 10 recent papers in the Social Science Research Network (SSRN) for studies related to Econometric Modeling: International Financial Markets.

Why the Gulf?

“Focusing on the Gulf countries in this study is quite interesting for several reasons: First, the stock market of Gulf countries is representative for the market capitalization of the Middle East region,” reads the paper.

“Besides, the market cap of those six countries represents 86 percent of the stock market in the Arab World countries. Second, the economic expansion of Gulf countries is critically interesting for countries worldwide ; they are considered as main exporters of oil worldwide and their economic indicators as well as their stock markets have a substantial impact on the economic trends of the other nations.”

Furthermore, ‘unlike other countries, the situation of Gulf countries is quite interesting as legalizing cryptocurrency in those countries is complicated. In the Islamic faith, economic transactions should be mainly based on real assets. The speculation which includes the cryptocurrency transactions is not compliant with Sharia Law that represents the cornerstone of laws in those countries.’

To assess how trading in crypto impacts the Gulf’s stock market, the researchers compiled ‘daily data on the stock market of the Gulf countries with the data on cryptocurrency market obtained from cryptocurrencycharts.com on a daily basis over the period 2014-2019.’

What have they found?

The researchers were inspecting whether there is a positive or negative relationship between the stock and cryptocurrency trading – meaning whether trading in cryptocurrency meant more or less investment in stock markets of the Gulf. What they found is that there is a negative relationship, meaning the more investors add cryptocurrency to their investment portfolio in the Gulf, the less they were investing in the stock market.

“Unlike most of stock market indices, the stock market index of Gulf countries is negatively correlated with the cryptocurrency index at high levels,” revealed the paper,“the results of this paper show that each 10 percent increase in the returns of the cryptocurrency market is associated with a 0.17 percent decrease in the returns of the stock market in Gulf countries.”

Takeaways

“It is important to note that the investors have now more options to diversify their portfolios,” highlighted the paper. “The choice of such a portfolio is becoming more complex, especially with the appearance of new potential channels of investments associated with potentially higher returns.”

What’s more; the results may prove to be alarming to policymakers and central banks in Gulf monarchies, with the researchers urging ‘regulators and policymakers to review their monetary and financial system in the light of the rapid growth of the cryptocurrency market and the increasing interactions between their potential investors and such a market.’

Full paper is accessible via this link

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