Unveiling the interlinkage between Ethereum and Nifty indices: impact of cryptocurrency on Indian equity markets post Covid-19

Abstract

Predictability of the various financial instruments can lead to more trust and investment. The study examines the long-term and causal relationship between various Nifty indices and the Ethereum cryptocurrency. This study considers the data from April 2015 to December 2022 in two phases, pre-covid and post-covid. Johansen’s cointegration test was used to determine if the vectors in the data set are cointegrated, using the Max-Eigen and Trace tests for evaluation. The Granger causality test was also used to explore the short-term causal relationship between Ethereum and the five Nifty indices. The study found that post-pandemic daily returns of stock market indices have developed a significant cointegration with the cryptocurrency over time. The Granger causality test results showed bi-directional relationships of Nifty 50, Nifty 200 and Nifty Next 50 with Ethereum and a unidirectional relationship between Nifty Auto and Ethereum. The non-linear results reveal a one-way relationship pre-covid and a bi-directional relationship post-covid except for Nifty Banks. Johansen’s cointegration test, both in the pre-and post-covid-era, indicated that these indices had a substantial long-term cointegration with cryptocurrencies. This study also offers guidance to investors in making long-term investment decisions and to regulatory authorities. This implied that the investing decisions resulted in developing a causal relationship between the equity market and cryptocurrencies, which seemed very unlikely before 2020. This indicates that a new and young investor also considered cryptocurrencies a viable alternate investment option compared to traditional options such as fixed deposits, gold, and other fixed-income instruments.