In Cryptocurrencies We Trust: An Empirical Analysis of Bitcoin Demand and Price

49 Pages Posted: 31 May 2019 Last revised: 28 May 2020

See all articles by Vasundhara Sharma

Vasundhara Sharma

University of Texas at Austin - Department of Information, Risk and Operations Management

Anitesh Barua

University of Texas at Austin - Department of Information, Risk and Operations Management

Andrew B. Whinston

University of Texas at Austin - Department of Information, Risk and Operations Management

Date Written: April 1, 2019

Abstract

Many pundits have alluded to cryptocurrencies as a bubble or Ponzi scheme. Yet, noted economists have long emphasized the need for competing currencies, and the usage of Bitcoin is high in countries where the fiat currency has experienced significant devaluation. With no central authority backing Bitcoin and other cryptocurrencies, what are the drivers of trust, demand, and market value of such currencies? The literature has posited hashrate, the speed of computations in Bitcoin mining, as a key factor contributing to user confidence due to increased security. Drawing upon the literature on technology adoption and network effects, we hypothesize Bitcoin related development activities on GitHub, and the size of the active user base, a proxy for network effects, as additional drivers of trust, demand, and price. With a comprehensive dataset we created from a large number of sources, we demonstrate that contrary to common wisdom, hashrate (which determines the cost of production) has no effect on either demand or price of Bitcoin. Instead, we find that the demand for Bitcoin and 19 other cryptocurrencies is primarily driven by technological progress in their open-source codebase on GitHub, and the size of their active user base. Further, new features and delays in addressing open issues have positive and negative impacts on demand respectively. Through text mining on data collected from online Bitcoin forums, we find strong associations between (i) GitHub activities and trust, and (ii) network effects and trust in the currency. Overall we establish a unique set of relationships between supply, demand, and price, and underscore the critical role of continuous technological progress in driving demand. Though many have alluded to cryptocurrencies as a baseless phenomenon involving “investor madness”, we find that there are rules governing their supply and demand and that there is “a method in (this) madness”

Keywords: bitcoin, transactions, block, mining, price, trust, network effects, hashrate

JEL Classification: G10, G12, G15, G19

Suggested Citation

Sharma, Vasundhara and Barua, Anitesh and Whinston, Andrew B., In Cryptocurrencies We Trust: An Empirical Analysis of Bitcoin Demand and Price (April 1, 2019). Available at SSRN: https://ssrn.com/abstract=3381067 or http://dx.doi.org/10.2139/ssrn.3381067

Vasundhara Sharma (Contact Author)

University of Texas at Austin - Department of Information, Risk and Operations Management ( email )

Anitesh Barua

University of Texas at Austin - Department of Information, Risk and Operations Management ( email )

CBA 5.202
Austin, TX 78712
United States
512-471-3322 (Phone)

Andrew B. Whinston

University of Texas at Austin - Department of Information, Risk and Operations Management ( email )

CBA 5.202
Austin, TX 78712
United States
512-471-8879 (Phone)

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