The Coins’ Other Side – Dynamic Relationships Between Pre-Crash Cryptocurrency Prices and Their Determinants

Abstract

Cryptocurrencies have become one of the most important and most disputed aspects in financial markets. However, the understanding of the price formation process for blockchain-based cryptocurrencies is still limited. This paper analyzes factors influencing the price of the five cryptocurrencies Bitcoin, Ethereum, Dash, Litecoin, and Monero in the time between January 2014 and July 2017. We conduct a Granger Causality study by estimating vector autoregressive models, vector error correction models, and autoregressive distributed lag models in order to test previously developed hypotheses on price determinants. The results suggest that the proportion of value of the global cryptocurrency portfolio as well as public attention are the two key factors that drive prices. The findings indicate that cryptocurrencies are subject to the formation of price bubbles, due to the reinforcing mechanism of positive feedback trading, herding, and public attention.

Keywords: Cryptocurrencies, Bitcoin, Virtual Currencies, ARDL, Speculation, Herding, Positive Feedback Trading, Public Attention, Alternative Investments

JEL Classification: G39, G12, E31