Digital currencies are a critical part of the digitization process. Along with gaining momentum with investors, digital currencies are being prominently covered by the media. Bitcoin, in particular, has reached multiple peaks within the previous few years while showing a continuous upward trend in value. The research conducted in this paper aims to uncover the major influencers of the value of bitcoin.
An approach using micro economic and macroeconomic models is used to categorize bitcoin as commodity or currency. Furthermore, five major digital currencies are also analyzed for correlation with the value of bitcoin and analysis of volatility in the exchange rates.
Based on the evaluation criteria, it is found that bitcoin can be classified as commodity more than currency due to high influence of supply and demand rather than macroeconomic factors. Also, it can be concluded that the price of bitcoin is highly correlated with the digital currency Monero while the other currencies analyzed show a small to medium correlation based on the Pearson correlation coefficient.
The paper also analyzes major changes in the historical timeline of bitcoin by the way of qualitative analysis of major events that may have caused volatility. In conclusion, a future outlook is provided which outlines upcoming changes per the author's opinion.
Table of Contents
1 Introduction
1.1 Bitcoin
2 Research Aim
3 Literature Review
4 Methodology
4.1 Microeconomic
4.1.1 Supply
4.1.2 Demand
4.2 Macroeconomic
4.2.1 Political
4.2.2 Economic
4.2.3 Social
4.2.4 Technological
4.3 Correlation
4.4 Timeline of Major Events and Price of Bitcoin
4.5 Problems with Bitcoin
5 Results
5.1 Microeconomic Analysis
5.2 Macroeconomic Analysis
5.3 Correlation Analysis
5.4 Volatility Analysis
5.5 Future Outlook
6 Conclusion
Research Objectives & Topics
This paper aims to investigate the factors influencing the price of Bitcoin by classifying the cryptocurrency as either a commodity or a currency through comparative analysis of microeconomic and macroeconomic models, while also examining its correlation with other major digital currencies.
- Comparative analysis of microeconomic (supply and demand) versus macroeconomic determinants of Bitcoin pricing.
- Evaluation of Bitcoin's classification as a commodity or currency based on model fit.
- Correlation and volatility analysis of the top five cryptocurrencies by market capitalization.
- Assessment of the impact of major historical events on the price of Bitcoin.
- Future outlook regarding the adoption and legitimacy of digital currencies in the financial system.
Excerpt from the Book
1.1. Bitcoin
Bitcoin is one form of digital currency which is based on a peer-to-peer network using open source software. Unlike government-backed traditional currency which is created by a single issuer, certified by the issuer, and used by many, bitcoin operates on a peer-to-peer network. A peer-to-peer network is organized as a set of nodes into a self organizing connected network. In addition to the peer-to-peer network, bitcoin is also characterized by open source software. The main feature of an open source software is its source code distribution with little or no copyright restrictions and the ability to modify the program as per user needs.
Created by user named Satoshi Nakamoto, the oversight of Bitcoin Foundation was passed on to Gavin Anderson who maintains the open source nature of the digital currency. Bitcoins are created by solution of a computational algorithm by miners. Solving the algorithm provides “proof” that the miner has completed the work himself/herself. The level of difficulty of the algorithm is subject to increasing cost over time along with an eventual limit on the number of bitcoins that can be created, thus limiting the overall supply of the currency, an important aspect which will be addressed later. New bitcoins are created as a reward for transaction processing work in which users can offer their processing powers to verify and record payments into a public ledger. Also known as mining, individuals or firms employ such activities in exchange for a chance to earn newly created bitcoins. Mining is an important part of cryptocurrency networks which is open source and uncensored. The intention of the resource-intensive activity is to deter anonymous participants in mining who may undermine the system. The assumption that Bitcoin Foundation undertakes is that all user nodes of the open source, peer-to-peer network are controlled by fraudsters and users with mal-intentions therefore pre-emptive efforts by increasing costs associated with mining and exploiting have been put in place [7, Hayes (2016)]. The increasing marginal “mining” costs of Bitcoin gives it a superficial resemblance to a precious metal standard [14, Selgin (2013)].
Summary of Chapters
Introduction: Provides an overview of the digitalization of finance and the emergence of Bitcoin, highlighting the challenges of decentralization.
Research Aim: Defines the core objective of the research: to determine if Bitcoin acts more like a commodity or a currency.
Literature Review: Discusses existing research on Bitcoin, market efficiency, and various valuation models.
Methodology: Details the microeconomic and macroeconomic variables used and explains the regression modeling approach.
Results: Presents the statistical findings, comparing the explanatory power of microeconomic versus macroeconomic factors.
Conclusion: Summarizes the study's finding that Bitcoin behaves more like a commodity and provides a summary of associated risks and future prospects.
Keywords
Digital currency, Cryptocurrency, Microeconomic, Macroeconomic, Supply, Demand, Variance Inflation Factor, Bitcoin, Litecoin, Ethereum, Monero, Dash, Ripple, Correlation, Volatility
Frequently Asked Questions
What is the primary focus of this research paper?
The paper focuses on identifying and understanding the variables that influence the price of Bitcoin, specifically investigating whether it should be classified as a commodity or a currency.
What are the central thematic fields covered?
The research examines microeconomic factors (supply and demand metrics), macroeconomic factors (PEST analysis), and the correlation between Bitcoin and other major cryptocurrencies.
What is the primary research question?
The central question is whether Bitcoin can be classified as a commodity, whose price is driven by supply and demand, or as a currency, influenced primarily by macroeconomic events.
Which scientific methods are employed?
The author uses empirical regression analysis, including the Augmented Dickey-Fuller test for stationarity and Variance Inflation Factor (VIF) for multicollinearity, alongside qualitative analysis of a timeline of major events.
What topics are discussed in the main body?
The body covers literature reviews, the definition of specific variables for both micro- and macroeconomic models, the methodology for testing these models, and a comparative analysis of the results.
Which keywords characterize this work?
Key terms include digital currency, cryptocurrency, microeconomic and macroeconomic models, supply and demand dynamics, market volatility, and correlation coefficients.
How does the author categorize Bitcoin in the results?
Based on the analysis, the author concludes that at the time of the research, Bitcoin can be classified more as a commodity than a currency, as microeconomic factors show a better model fit.
Why are other cryptocurrencies like Monero and Ripple included in the study?
They are analyzed to test whether the factors influencing Bitcoin also affect other digital assets, with Monero showing a notably high correlation with Bitcoin prices.
- Citar trabajo
- Alisha Dhiri (Autor), 2017, Influences on the Price of Bitcoin, Múnich, GRIN Verlag, https://www.grin.com/document/432078
