Study: Speculation Isn't the Sole Driver of Bitcoin Prices

The newly released academic paper found evidence that the bitcoin market is maturing and building fundamentals.

AccessTimeIconJun 4, 2014 at 9:21 p.m. UTC
Updated Sep 14, 2021 at 2:06 p.m. UTC
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There are a number of factors claimed by market-movers, observers and everyday investors as to what exactly influences the price of bitcoin. However, one new study has analyzed key drivers in the bitcoin market, and its findings could have an impact on how investors approach digital currencies in the future.

For example, the authors notably found that while there is a great deal of connectivity between the two, there is no clear evidence that the Chinese bitcoin market has a significant impact on activity in USD markets.

Entitled “What are the main drivers of the Bitcoin price?”, the paper by Ladislav Kristoufek of the Institute of Economic Studies at Charles University in Prague explores the economic, financial and perceptive catalysts for changes in the price of bitcoin. To do so, it leverages wavelet coherence analysis, a mathematical tool for data analytics, when examining information from the bitcoin market.

Kristoufek noted in the study that the properties of bitcoin, compared to other currencies, make it ideal for analysis, saying:

"Compared to the standard currencies such as the US dollar, the euro, the Japanese yen and others, bitcoin shines due to an unprecedented data availability. It is completely unrealistic to know the total amount of the US dollars in the worldwide economy on a daily basis. However, bitcoin provides such information on daily basis, publicly and freely."

He added: "Such data availability allows for more precise statistical analysis".

China's influence

Kristoufek acknowledges that major bitcoin events in China have an impact on the broader global market. Indeed, he concedes that both markets “tend to move together very tightly both in prices and in volumes” when looking at data from 2013.

Yet, he argues that the relationship lies primarily in volume, whereas prices are less connected. This, Kristoufek asserts, means that the interactions between these two markets might be less significant than some observers claim.

He wrote:

"Even though the USD and CNY markets are tightly connected, we find no clear evidence that the Chinese market influences the USD market."

However, Kristoufek notes that China remains an "important player" in the bitcoin ecosystem.

Bitcoin not a safe haven

The paper also explored the concept of bitcoin as a safe haven asset, one that would theoretically be leveraged during times of economic strife.

Kristoufek uses the case of the financial crisis in Cyprus as a lone example. Utilizing the Financial Stress Index from the Federal Reserve Bank of Cleveland, as well as the price of gold denominated in Swiss francs, he paints a picture that suggests bitcoin has not - at least yet - been treated as a safe haven asset.

The author suggested that there are correlations between the event in Cyprus and the use of bitcoin as a safe haven, explaining:

"Apart from the Cypriot crisis, there are no longer-term time intervals where the correlations are both statistically significant and reliable (in a sense of the cone of influence)."

Additionally, there were few indications of a deep relationship between bitcoin and movements in gold - arguably one of the world’s key safe haven assets - leading Kristoufek to conclude that "we find no signs of bitcoin being a safe haven".

Market perception

Among Kristoufek’s findings is the idea that investor interest and the overall popularity of bitcoin puts pressure on prices, but that the forces are not equal during upswings and downturns in the market.

He used Google and Wikipedia searches for “bitcoin” and sought correlations between those search terms and dates when notable changes in the price of bitcoin occurred.

Kristoufek found that the velocity of price gains and losses in bitcoin is ‘asymmetrical’, writing:

"The interest and prices are then negatively correlated and the interest still leads the relationship. However, the correlations are found at lower scales than for the bubble formation. The interest in bitcoin thus seems to have an asymmetric effect during the bubble formation and its bursting – during the bubble formation, the interest boosts the prices further, and during the bursting, it pushes them lower."

He added negative interest in bitcoin appears to be more impactful than positive interest in regards to the price, saying that this creates “a more rapid effect during the price contraction than during the bubble build-up.

Fundamental forces

According to Kristoufek, there are plenty of observers of bitcoin who say that speculation remains the key driver of price changes. While he doesn’t directly dispute this statement, he posits that there are fundamentals which can be found to influence the market.

He wrote:

"Even though bitcoin is usually labelled as a purely speculative asset, we find that standard fundamental factors – usage in trade, money supply and price level – play a role in bitcoin prices in the long term."


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