A Crypto Safe Haven against Bitcoin

 

Introduction :

Since the creation of Bitcoin in 2009, its price has been increasing by a value is equal to zero up to $1100 at the end of the year 2013.  Then, its value drops to about $250, however it remains to increase with high volatility. This price fluctuation is not usual for traditional currencies. For this reason, several authors seek to study the formation of the price of Bitcoin. In this article, Ciaian, Rajcaniova and Kancs (2015) analyze the effect of different determinants on the price of Bitcoin. This is because they use traditional determinants (both functions: supply and demand), specific factors (the attractiveness of Bitcoin) and macroeconomic and financial determinants.

Problem question:

"What are the factors that affect Bitcoin prices?"

Objective :

•  To study the impact of each determinant on the formation of Bitcoin prices  
•  To analyze the interaction between the various factors taking into account the structural breaks in the Bitcoin price series.

Literature review : 

• Buchholz et al (2012), Bouoiyour and Selmi (2015), indicate that one of the main determining factors of Bitcoin prices is the interaction between the supply and demand of this cryptocurrency.

• Bouoiyour and Selmi (2015) argue that Bitcoin is largely detached from macroeconomic fundamentals, and behaves like "a speculative bubble". they find that attractiveness has a greater impact on the formation of Bitcoin prices than other determinants.

• Gervais, Kaniel, and Mingelgrin; Grullon, Kanatas, and Weston and Barber and Odean find that the decisions of investors and potential users can be affected by an increase or decrease in attention in the news media. For this, the role of information is especially important in the presence of many alternative investment opportunities, such as positive research costs and security issues.

• Wijk emphasizes the fundamental role of the macroeconomic and financial factor on the price formation of Bitcoin.

• Krugman and Obstfeld; Palombizio and Morris, Present that the oil price is one of the main sources of demands and costs, and therefore it is considered as an indicator showing the level of inflation. They explain that when the oil price detects the change in the general price level, then it can lead to an increase or decrease in Bitcoin price. And They explain, thus, that the exchange rate can reflect the development of inflation, and therefore it can have a positive impact on the price of Bitcoin.

So the hypotheses of this problem are presented as follows :

Hypothesis 1: Market forces: supply and demand

Hypothesis 2: the attractiveness factor

Hypothesis 3: the macroeconomic and financial factor

Results :

Hypothesis 1 :

Ciaian, Rajcaniova and Kancs (2015) find that supply and demand have a large impact on the price of Bitcoin. Indeed, demand-related indicators have a higher effect than supply-related ones.

They indicate that when the stock level increases the price of Bitcoin increases as well. the transaction volume and the number of addresses positively affect the price of Bitcoin in the first and second period. As a result, speed negatively influences the price of Bitcoin in the short term. While in the long run, this variable does not significantly affect the Bitcoin exchange rate.

Hypothesis 2 : 

Ciaian, Rajcaniova and Kancs (2015) find that attractiveness is an important determinant. However, its effect is sometimes positive and negative. This implies that this factor depends essentially on the type of positive or negative information on the market.

Hypothesis 3 : 

Researchers note that the factor of macroeconomic and financial does not have a significant effect on the price of Bitcoin.

Conclusion :

This article analyze, on the one hand, the impact of each determinant on the formation of Bitcoin prices. The researchers find that demand-related indicators have a higher effect than supply-related ones. Thus, they indicate that the effect of attractiveness depends essentially on the type of positive or negative information on the market. In addition, they find that the macroeconomic and financial factor does not have a significant effect on the price of Bitcoin. And on the other hand, they notice that the interaction between the different factors, together in the same model, can change the effect of each determinants.