The study titled "The Bitcoin price formation: Beyond the fundamental sources" by Jamal Bouoiyour and Refk Selmi investigates the relationship between Bitcoin price and its various determinants. The authors use a Bayesian quantile regression approach to examine the least to most influential factors across fundamental, macroeconomic, financial, speculative, and technical determinants. They also analyze events in 2016 that drove the value of Bitcoin during times of economic and geopolitical turmoil. Through their research, the authors identify three groups of determinants that influence Bitcoin price. During periods of market improvement, factors such as the use of Bitcoin in trade and uncertainties surrounding China's slowdown, Brexit, and India's demonetization were found to significantly contribute to Bitcoin price. In contrast, when the market is heading into decline, several fundamental factors such as velocity of bitcoins in circulation, gold prices, Venezuelan currency demonetization, and hash rate were found to have an impact on Bitcoin price. This study offers valuable insights into understanding the complex relationship between Bitcoin price and its determinants. By considering a wide range of factors across different economic contexts, it provides a comprehensive analysis that can help investors and policymakers better understand and predict fluctuations in Bitcoin prices.
This study looked at how the price of Bitcoin is related to different things that affect it. They used a special way of analyzing data called Bayesian quantile regression. They found three groups of things that influence the price: how much people use Bitcoin for trading, uncertainties like problems in China or Brexit, and important factors like how many Bitcoins are being used and the value of gold. These factors have different effects when the market is getting better or worse. This study can help investors and policymakers understand and predict changes in Bitcoin's price.
Definitions
- Bitcoin: a type of digital money that can be used to buy things online
- Price: how much something costs
- Determinants: things that affect or influence something
- Bayesian quantile regression: a way of analyzing data to find relationships between variables
- Trade use: how much people use Bitcoin for buying and selling things
- Uncertainties: things that are not sure or certain, like problems or changes in the world
- Fundamental factors: important things that have an effect on something
- Velocity: how fast something moves or changes
The Bitcoin Price Formation: Beyond the Fundamental Sources
Cryptocurrencies have gained significant attention in recent years, with Bitcoin being the most well-known and widely used. As a decentralized digital currency, Bitcoin has attracted investors and policymakers alike due to its potential for disrupting traditional financial systems. However, the price of Bitcoin has been highly volatile, making it challenging to predict and understand its movements. In response to this issue, Jamal Bouoiyour and Refk Selmi conducted a study titled "The Bitcoin price formation: Beyond the fundamental sources" to investigate the relationship between Bitcoin price and its various determinants.
Research Methodology
To examine the factors influencing Bitcoin price, Bouoiyour and Selmi used a Bayesian quantile regression approach. This method allows for an analysis of both linear and non-linear relationships between variables at different points along the distribution of data. The authors collected data from January 2010 to December 2016 from various sources such as CoinDesk, Yahoo Finance, World Bank database, among others.
Identifying Determinants of Bitcoin Price
Through their research, Bouoiyour and Selmi identified three groups of determinants that influence Bitcoin price: fundamental factors (such as trade volume), macroeconomic factors (such as inflation rates), and technical factors (such as hash rate). Within these groups are subcategories that further explain how each determinant affects the value of Bitcoin.
Fundamental Factors
Fundamental factors refer to those directly related to the use of Bitcoins in transactions or trade activities. According to Bouoiyour and Selmi's findings, during periods of market improvement (when prices are rising), fundamental factors play a significant role in driving up the value of Bitcoins. These include:
- Use in Trade: The more Bitcoins are used in transactions or traded on exchanges globally; their demand increases leading to higher prices.
- Uncertainties in Major Economies: Economic and geopolitical uncertainties, such as China's slowdown, Brexit, and India's demonetization, can also contribute to an increase in Bitcoin price. During times of uncertainty, investors may turn to Bitcoin as a safe haven asset.
Macroeconomic Factors
Macroeconomic factors refer to the overall state of the economy and how it affects the demand for Bitcoins. The study found that during market downturns (when prices are falling), macroeconomic factors have a more significant impact on Bitcoin price compared to fundamental factors. These include:
- Velocity of Bitcoins in Circulation: When there is an increase in the velocity of Bitcoins being used for transactions or traded on exchanges, it leads to a decrease in their value.
- Gold Prices: As gold is often seen as a store of value during economic downturns, its price has an inverse relationship with Bitcoin price.
- Currency Demonetization: Events such as Venezuela's currency demonetization can lead people to turn towards alternative currencies like Bitcoin.
Technical Factors
Technical factors refer to those related to the underlying technology behind Bitcoin. These include:
- Hash Rate: The hash rate measures the processing power used by miners on the network. A higher hash rate indicates increased mining activity and can lead to higher prices.
- Difficulty Level: The difficulty level refers to how challenging it is for miners to solve complex mathematical problems required for mining new Bitcoins. An increase in difficulty level can lead to lower prices due to decreased profitability for miners.
Insights from 2016 Events
Bouoiyour and Selmi also analyzed events that occurred in 2016 that had an impact on Bitcoin price. They found that during periods of economic turmoil or political uncertainty (such as Brexit), there was a significant increase in demand for Bitcoins leading up to these events. However, after the events took place, there was a decrease in Bitcoin price as investors' fears subsided.
Implications for Investors and Policymakers
The study by Bouoiyour and Selmi offers valuable insights into understanding the complex relationship between Bitcoin price and its determinants. By considering a wide range of factors across different economic contexts, it provides a comprehensive analysis that can help investors better understand and predict fluctuations in Bitcoin prices. Moreover, policymakers can use this research to develop regulations and policies that consider the various factors influencing Bitcoin price.
Conclusion
In conclusion, Bouoiyour and Selmi's study sheds light on the intricate relationship between Bitcoin price and its determinants. It highlights the importance of considering fundamental, macroeconomic, financial, speculative, and technical factors when analyzing changes in Bitcoin prices. By providing insights into how these factors interact with each other during different market conditions, this research contributes to a better understanding of cryptocurrency markets.
Much significant research has been done to investigate various facets of the link between Bitcoin price and its fundamental sources. This study goes beyond by looking into least to most influential factors-across the fundamental, macroeconomic, financial, speculative and technical determinants as well as the 2016 events-which drove the value of Bitcoin in times of economic and geopolitical chaos. We use a Bayesian quantile regression to inspect how the structure of dependence of Bitcoin price and its determinants varies across the entire conditional distribution of Bitcoin price movements. In doing so, three groups of determinants were derived. The use of Bitcoin in trade and the uncertainty surrounding China's deepening slowdown, Brexit and India's demonetization were found to be the most potential contributors of Bitcoin price when the market is improving. The intense anxiety over Donald Trump being the president of United States was shown to be a positive determinant pushing up the price of Bitcoin when the market is functioning around the normal mode. The velocity of bitcoins in circulation, the gold price, the Venezuelan currency demonetization and the hash rate were found to be the fundamentals influencing the Bitcoin price when the market is heading into decline.
