According to Graph 3, a long-term relationship between lnprice and lnbtc curves was observed, with the aspect of cointegration between them. The choice to use the VEC model is due to the need to understand if there is an influence of the attractiveness factor in the price and if the price also explains the factors of attractiveness in the short and long term. In this way, the model allows the construction of equations in which the price is dependent variable while, in the other equation, it is independent, plus price information lagged. The insertion of the error correction term allows understanding the long term dynamics, which would not be possible in a process of differentiation of the variables. Table 7 presents the coefficients of the cointegration matrix β1 and β2 of the error correction term by sovereign currency. The biggest change in the number of online news stories about an economic crisis—a 99% increase from one week to the next—occurred during the week of June 28, 2015. According to G1 , Greece had failed to pay part of its indebtedness to the International Monetary Fund .
The independent variable Δlncrasht− 1, which identifies the moments in which there was some negative event for the virtual currency community, resulted in the equation Δlnpricet, a negative and significant coefficient, in both specifications. This is an intuitive result since negative events tend to be accompanied by an increase in market mistrust and, consequently, a fall in price. This variable is fundamental, while allowing the model to identify the moments in which there is an intense fall of the price and better adjusting the curve of the model to the valleys. It is estimated that a positive variation of 1% in the number of searches for bitcoin crash is followed in the following period by a decrease of 0.06% in the price when only short term is analyzed. It is anticipated that the hypotheses and a feedback effect between endogenous variables will be confirmed.
- The expectation is that the more frequent the use of money, the greater the demand and, consequently, the higher the price for bitcoins .
- Al-Khazali et al. argued via a GARCH model that Bitcoin is weakly related to macro-developments due to low predictability for Bitcoin return and volatility after macroeconomic news surprises.
- Based on the weekly return calculation of this curve, we selected the five largest positive returns for determining the crisis dummy variable.
- In this sense, Nakamoto compared the digital currency to a stream of digital signatures.
The vector Ɛt refers to independent, random and uncorrelated disturbances (Ɛt ~ i.i.d. (0; In)). Searches on electronic media for information about what Bitcoin is and how it works may be a variable that explains demand increases for the coin and, consequently, its price. Some authors sought to estimate a relationship between the search history of the term Bitcoin on platforms such as Google (Kristoufek 2013; Buchholz et al. 2012; Bouoiyour and Selmi et al. 2015; Polasik et al. 2015; Nasir et al. 2019), Wikipedia , Twitter and online forums (Kim et al. 2017). Based on this behavior, Dyhrberg said that bitcoin could be used as a hedging product for the dollar exposure in the short term and as an additional instrument for market analysts to protect against specific risks. It should be noted that the dollar quotation against other currencies was negatively correlated with the Bitcoin price, not only in the short term but also in the long run, according to Van Wijk and Zhu et al. .
For the currency analysis, prices were selected in twelve sovereign currencies, specifically those that have presented data for the period required and with higher volumes traded at the brokerage firms. Therefore, the local price is denominated in the respective sovereign currency, based on the negotiations between users of these currencies. The perception that search for Bitcoin acquisition is related to the population’s growing interest in the virtual currency can be verified using short- and long-term analysis based on i) price, ii) number of searches for the word bitcoin in Google and number of searches for the word bitcoin crash in Google. The methodology chosen to evaluate this hypothesis is the vector error correction model , derived from vector autoregressive model, to be detailed below. The coefficient of adjustment α2, applied to the cointegration matrix β2 is also negative in the equation Δlnpreçot. By analyzing the coefficients of β2, it is inferred that a sudden increase of lnbtct-1, results in a negative error which, when multiplied by α2, leads to an increase of Δ lnprice. In contrast, a sudden increase of lncrasht-1 generates a positive error which, when multiplied by α2, generates a decrease of Δ lnprice.
In practice, two non-stationary series with a stochastic tendency and with common displacements over time are said to be cointegrated. Nakamoto described Bitcoin as an electronic currency embedded in a peer-to-peer system and capable of being transferred directly from one participant to another without the intermediation of a financial institution. A process called proof of work helps to assure that duplicate transfer expenses are avoided. Through this process, the Bitcoin network confirms each transfer as legitimate and unique by analyzing the digital signature and recording the chronological order in which the transaction took place. The ADF test describes lnprice, lncrash and lnbtc variables as being integrated of order 1, I . The long-term relationship is given by ΠXt-1, with p being the number of lags in the model. The term Π can be decomposed into α, the adjustment matrix, and β, the cointegration matrix.
In this sense, there is no consensus among scholars about using of the term currency when referring to Bitcoin. Some relevant aspects of Bitcoin differ from traditional fiduciary currencies that will be analyzed. On the other hand, a sudden increase of lncrasht-1 generates a positive error which, when multiplied by α2, generates a decrease of Δ lnprice. Read more about DRGN Exchange here. The histogram of the residuals of the model shows a concentration of the near zero observations with progressive reduction of the frequency along the tails. In order to verify the existence of serial correlation in the residuals of the model, the tests of Portmanteau and Breusch & Godfrey were applied. The test results showed that the null hypothesis of no serial correlation cannot be rejected at the significance level of 5%. For stability analysis of the model, the eigen values were obtained and they are contained within the unit circle, confirming the stability of the model. Based on the case of series with a unit root, if each element of a vector of time series Xt, stationary only after the first differentiation, generates by linear combination βXt a stationary process with finite variance, they are said to be cointegrated.
This research is based on previous studies that used the same methodology and similar variables of attractiveness. The result of the VEC model and the significance of the coefficients demonstrate that the increase in Bitcoin interest, as measured by the number of searches for the keyword bitcoin , is followed by an increase of Bitcoin price. The bidirectional relationship exists and demonstrates that price Granger-causes the behavior of lnbtc and lncrash, intensifying the understanding that there is a speculative driver in Bitcoin’s transactions. The coefficients for the variable Δlnbtct-1 in the equation Δlnpricet are positive for all currencies and are significant at the level of 5% for six of twelve.
Bitcoin Price Table, 2010
The study defined Bitcoin as an investment asset rather than as a currency, because of its sensitivity to variations in macroeconomic indices. The study also noted that there was evidence of Granger causality in relation to gold price and dollar index factors as applied to the dependent variable Bitcoin price. In VAR analysis, therefore, n variables are established to compose the model, which will contemplate n equations so that each variable is dependent on one of the equations and independent on the others. Each equation has as independent variable lags of the dependent variable itself and lags of the other variables, plus an error term. The objective of this model is to understand how past data influences the values of the dependent variable in the present. The initial hypothesis of the research is that attractiveness factors influence the Bitcoin price at both global and local levels, updating previous studies of attractiveness pricing.
Therefore, variations in the factors that determine and directly impact the demand curve enable the high volatility of this currency over time. In this sense, research seeks to use the variables that directly influence demand to predict currency pricing. The analysis of VECM results, summarized in Table 5, shows that the coefficient of the independent variable Δlnbtct-1, in the regression Δlnpreçot, is positive, equal to 0.07 and significant only to level of 10%. In this sense, it is inferred that a 1% increase in Google searches for the term bitcoin may be accompanied in the following period by a weekly increase of 0.07% of the current price of the digital currency. It is interesting to note that most published studies give important prominence in their analyses to attractiveness factors, such as the variable number of searches over time using the term bitcoin in Google Web Search.
These combined attractiveness factors define the interest of the world’s population in the asset, as measured by the number of Google searches for the terms bitcoin and bitcoin crash between December 2012 and February 2018. The procedure applied to BCX can be replicated to local prices specified by each sovereign currency. The objective is to check if prices traded in different currencies are also influenced by the structure of the global variables previously established. Only price observations are altered, which will be denominated in each respective currency. The expectation is that world events consistently impact the price at local brokerages. Bitcoin.com is a platform that aims to help Bitcoin stakeholders by offering news, brokerage, and quantitative analysis tools.
The curve obtained is described in Graph 2, which is about the impact of crises on Bitcoin pricing. Based on the weekly return calculation of this curve, we selected the five largest positive returns for determining the crisis dummy variable. The purpose is to analyze whether, during the five biggest positive changes caused by the increase in the number of searches for crisis news, the Bitcoin price also increased. If the database week corresponded to one of those times of greatest variation, the dummy crisis for that week was equal to 1, otherwise the value was zero. The Bitcoincharts platform is also a quantitative analysis tool that provides the Bitcoin price. However, it details the data by date, by sovereign currency, by brokerage and by volume; therefore, it is possible to have greater detail of the behavior of the price in different regions and even to analyze the spread between different countries.
Bitcoin Price Chart, 2010
The lack of regulation is also an unfavorable criterion, since it eliminates judicial settlements of disputes and makes it difficult to obtain reimbursement from operations prejudiced against cryptocoins. In November 2017, the Central Bank of Brazil – Bacen said that does not regulate or supervise virtual currencies even though it monitors related discussions in international forums. In addition, the bank emphasized the imponderable risks of this type of investment to the market, including the loss of all invested capital. He has worked for Google, NASA, and consulted for governments around the world on data pipelines and data analysis. Disappointed by the lack of clear resources on the impacts of inflation on economic indicators, Ian believes this website serves as a valuable public tool. Based on Engle and Granger , the cointegration is characteristic of a series vector Xt, with the same order of integration d, whose linear combination results in a process with integration order d minus b, according to Eq. Bitcoin emerged at a time of massive expansion of the Internet, search engines, and social networks.
Once the daily BCX curve was obtained, the average daily price for weekly data aggregation was computed. The average daily price for 1 week, therefore, represents each observation of the price variable in the overall analysis of the survey. The increasing realization of Bitcoin transactions tends to stimulate its adoption by other economic agents, boosting the demand for bitcoins. Ciaian et al. noted that the size of the bitcoin economy’s impact on demand tends to grow over time. The expectation is that the more frequent the use of money, the greater the demand and, consequently, the higher the price for bitcoins . Polasik et al. cited e-commerce as a major driver of payment systems that do not involve banking institutions and, in this sense, payment service providers aid in the development and adoption of virtual currencies.
What price did Bitcoin start?
The cryptocurrency’s first big price increase occurred in 2010 when the value of a single bitcoin jumped from just a fraction of a penny to $0.09. The cryptocurrency has undergone several rallies and crashes since it became available.
Understanding these interests is fundamental to create alternatives to avoid governments having their currencies depreciated against Bitcoin. The generalization of VAR model, order p, with the addition of exogenous variables is given by Eq. Being ɸ the coefficient vector n x g and D is the matrix containing exogenous variables. This entire technological and cryptographic framework already makes Bitcoin different from sovereign currencies, primarily because of its ability to be cited as a representation of digital value and its virtual decentralization.
Vector Autoregressive Model
The terms searched in the tool were bitcoin and bitcoin crash covering the whole world and all categories. The result of these two surveys generated two curves with weekly values that will represent the btc and crash variables. Peaks in Google Trends searches for the term bitcoin crash as shown in Graph 1 is a graphical representation of negative news events that have had an intense and negative impact on Bitcoin’s price. Details of these events will attempt to demonstrate that bitcoin pricing seems to be highly sensitive to such sudden events. Ciaian demonstrated that the increase in the number of available bitcoins was related to a decrease in its price, while the increase in the number of addresses accompanied an increase in price. Considering that the amount of currency offered by the Bitcoin platform is finite and known, Buchholz et al. stated that fluctuations in the Bitcoin price occurred mostly because of shocks in the demand curve. In addition to the factors highlighted above, there are others that measure the size of the Bitcoin market and cause a direct shock to the curve. Such examples include the volume variables of daily transactions and transfers by network users. The equilibrium point of the supply and demand curve determines the Bitcoin price in a brokerage firm. However, what is peculiar about this digital currency is that the supply curve is known and pre-determined since there is a definitive limit on the quantity of virtual money offered in the market.
Also, cryptocurrencies could be illegally used to facilitate Trade-based Money Laundering schemes and it can be justified by the easy way the digital coins are transferred. Chao et al. say that TBML is seriously concerned by emerging markets and developing economies in a way that regulations and methods to monitor and fight against it have been created. The volume variable, according to Bouoiyour and Selmi , impacts Bitcoin pricing in the short term. Balcilar et al. emphasized that the variable can predict returns, except in up- or down-market periods. Therefore, under normal market conditions, investors have transacted volume as a prediction tool; in contrast, during stress scenarios, an association between the variable and price returns is not identified.
The coefficients for the variable Δlncrasht-1 are also significant at the 5% level for nine of twelve and, as expected, are all negative. It should be noted that the coefficient of lnpricet-1 is positive in β1, so that a rise of lnprice in t-1, not accompanied by a proportional increase of the variable lnbtct-1, which neutralizes this increase, represents a deceleration in the Δ lnprice in t, considering the fact α1 is negative. On the other hand, the coefficient of lnbtct-1 is negative in β1, which means that an increase of lnbtct-1, not accompanied by lnpricet-1, generates a pressure so that in the following period the variation of lnprice also increase. Table 4 presents the parameters of the cointegration matrix β1 and β2 of the error correction term. In Table 5, the adjustment coefficients of the error correction term are presented, α1 and α2. In order to run VECM, a level data series is used without any stationarity transformation, and the two main stages are performed in advance. The first concerns the selection of the number of lags that optimize the analysis; Bueno emphasizes that the choice must contemplate the optimal lag considering all variables under analysis to obtain white noises in all of them. The second stage consists of the application of the Johansen cointegration test , by the trace and eigenvalue statistics, through the function ca.jo of the Rstudio urca package. When the variables established in VAR are cointegrated, it is recommended to adopt VECM. The difference with VAR model lies in the inclusion of an error correction term that seeks to measure how the system reacts to long-term equilibrium deviations caused by shock in the variables.
Which crypto will explode?
An initial investment of $1,000 in SafeMoon would now have been worth around $3.5 million. In the series of crypto revolutions, EverGrow Coin is set on track to become the next cryptocurrency to explode in 2022. It was the first major Yield Generation token that rewards its users in BUSD.
The Dow Jones index, according to Van Wijk , seemed to be positively correlated in the short and long term with the Bitcoin price. The study suggested an improvement in the performance of the U.S. economy could generate positive effects on Bitcoin pricing. Bouoiyour and Selmi saw the Shanghai index as a positive and short-term influence because of their perception that the Shanghai market was one of the big players in transactions with the virtual currency. In contrast, Dyhrberg said Bitcoin might be a possible hedging instrument against FTSE index variations, having no correlation with the 100 largest listed companies on the London Stock Exchange. This study adds to the analysis the crisis variable through a measurement of the number of Google searches using the term crisis. It seeks to verify if, in troubled periods of crisis with repercussions at the global level, Bitcoin tends to be more attractive as an alternative investment, as evidenced by an increase in its price.
The application of the Johansen cointegration test shows that the price curve and the lnbtc and lncrash variables are cointegrated, and the test rejects the null hypothesis of non-existence of a cointegration vector. Also, it does not reject the null hypothesis of existence of two cointegration vectors, according to Table 3. From this result, the VECM proves to be more adequate than the VAR, with the insertion of the error correction terms to perform the long-term adjustment in the system. It is possible to identify a strong relationship, in the short and long term, between the terms in Google searches and the Bitcoin price. The cointegration test of the curves performed describes a tendency of simultaneous growth or decline between them. The estimated VEC model confirms the long-term dynamics based not only on the global analysis, but on a more detailed analysis of prices negotiated in different sovereign currencies.
Some authors have verified in their research that macro-financial variables do not have a statistically significant influence on Bitcoin pricing in the long term (Bouri et al. 2017; Chao et al. 2019; Ciaian et al. 2016a; Polasik et al. 2015). The price of gold, much compared to Bitcoin, also does not seem to be related to Bitcoin pricing (Bouoiyour and Selmi 2015; Kristoufek 2015). However, in the short term, economic factors seem to have a significant impact, as in the U.S. dollar quotation (Dyhrberg 2016; Zhu et al. 2017) and in the Chinese market represented by the Shanghai index (Bouoiyour and Selmi 2015; Kristoufek 2015). The sum of the alphas allows to infer that α1 e α2 contribute proportionally with 59% and 41%, respectively, for long-term dynamics. Zhu et al. is one of the most recent studies about the impact of macroeconomic-financial factors on Bitcoin pricing. The author used some of the variables that affect gold pricing to identify those that have the same effect on Bitcoin pricing.
Bitcoins priced in different sovereign currencies follow global price behavior and are quickly adjusted by changing interest in currencies around the world and by crisis events. There are authors who report that they find no consistent evidence regarding the causal relationship between macroeconomic variables and the Bitcoin price. When including demand and attractiveness variables in their model, Ciaian et al. concluded that there was no significant statistical relevance of macroeconomic factors such as the Dow Jones index and oil prices and suggested speculation was the primary driver of price. Polasik et al. concluded that the correlation between Bitcoin returns and the fluctuations of sovereign currencies was weak and statistically insignificant. Al-Khazali et al. argued via a GARCH model that Bitcoin is weakly related to macro-developments due to low predictability for Bitcoin return and volatility after macroeconomic news surprises. According to Al-Khazali et al., the cryptocurrency acts more like a risky asset than a safe haven instrument. When analyzing the regression of the dependent term Δlnbtct, the independent variable Δlnpreçot-1 is significant at the 5% level. It is inferred, therefore, that a 1% increase in the Bitcoin price is followed in the following period by a weekly increase of around 0.92% of searches for Bitcoin. With these results, it is possible to establish a bidirectional dynamic between lnbtc and lnprice. It is suggestive that the intensification of the interest of the population in Bitcoin influences positively the value of the currency and the reverse also seems to be coherent, that is, the increase of the price intensifies the number of searches.
In addition, the country declared a bank holiday and limited electronic withdrawals to no more than €60 a day. A rather pessimistic scenario developed with the increasing probability that Greece would adopt capital controls and possibly leave the European Union. The country’s exit would result in a devaluation of the euro, probable default on Greek debt, an increase in investor mistrust regarding the economic future of the emerging countries. Concurrent with the Greek crisis and subsequent to the peak news date, Bitcoin price increased for three consecutive weeks, a 17% appreciation. Brokers around the world reported a sudden upsurge in computer operations originating in Greece, with China’s LakeBTC experiencing a 40% increase in Greek participation on its platform . The brokerage firm, BTC.sx, reported an increase in the number of operations coming from the Eurozone . According to Grendan O’Connor, CEO of the electronic platform Genesis Trading, the Greek crisis appeared to be the only relevant factor in the bitcoin price increase. He added that the firm’s trading desk raises the price of virtual currencies in cases of macroeconomic events that are detrimental to the main sovereign currencies . Google Trends is a tool provided by Google that provides information about the number of searches on the platform for a particular word or term, and providing the ability to specify the analysis for a given period and country. The numbers obtained are normalized in the range of 0 to 100, so that 100 represents the highest popularity peak of a term in a given region over a given period.