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

51 Pages Posted: 31 May 2019 Last revised: 8 Sep 2021

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 19, 2019

Abstract

With no central authority backing Bitcoin and other major cryptocurrencies, technological progress in an open-source setting and decentralized consensus mechanisms such as Proof-of-Work (PoW) governing the production side are the essential elements for the operation of most cryptocurrencies. While studies have largely focused on speculation as a key driver of demand, we examine how technological advances in the cryptocurrency codebases impact demand and returns. On the supply side, a higher hashrate, i.e., the amount of computing power used, enhances the security of PoW systems by increasing the cost of attacks, which may positively impact user perceptions and demand. However, increasing hashrate is also correlated with substantial carbon emissions and the emergence of large mining pools, which may negatively affect the demand. We hypothesize technological development activities on GitHub and hashrate to be significant demand and returns drivers, albeit in opposite directions. We create a comprehensive dataset for five dominant cryptocurrencies using the PoW consensus and demonstrate that GitHub developments are associated with higher demand and returns. Contrary to common wisdom, we demonstrate that hashrate has a significantly negative effect on the demand and returns of these major cryptocurrencies. In exploring plausible mechanisms, we perform sentiment analysis on user conversations and demonstrate that technological advances are associated with positive sentiments. Higher hashrate and the presence of large mining pools are associated with negative sentiments. Overall, we establish a unique set of relationships between supply, demand, and returns, and underscore the critical role of continuous technological progress, more efficient mechanisms, and user communication in driving cryptocurrency demand. Our study provides policy implications for cryptocurrency development communities. Given the low immunity to centralization and the detrimental environmental effects of the PoW mechanism, which negatively impact user perceptions, demand, and returns, cryptocurrency developer communities should consider switching to a superior eco-friendly mechanism.

Keywords: Cryptocurrencies, technology, mining, price, demand, 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 Cryptocurrency Demand and Price (April 19, 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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