On the Transmission of News and Mining Shocks in Bitcoin

41 Pages Posted: 31 Oct 2019 Last revised: 5 Nov 2019

See all articles by Ester Faia

Ester Faia

Goethe University Frankfurt; Centre for Economic Policy Research (CEPR)

Sören Karau

Goethe University Frankfurt

Nora Lamersdorf

Goethe University Frankfurt

Emanuel Moench

Deutsche Bundesbank; Goethe University Frankfurt - Department of Money and Macroeconomics

Date Written: September 2019

Abstract

Cryptocurrency prices fluctuate strongly despite the fact that their supply typically follows mechanical rules. In this paper we focus on two determinants of Bitcoin valuations. Using an agnostic narrative approach to identify exogenous events related to Bitcoin mining (mining shocks) and news affecting investor perception (news shocks), we first show that both types of events have sizable and persistent effects on Bitcoin valuation and aggregate mining activity. We then rationalize our findings in a model with search frictions in which heterogeneous investors can trade Bitcoin but have their transactions validated by competitive miners. The model endogenously generates waiting times and an equilibrium distribution of asset positions, which is driven by competition among miners on validation speed. Finally, we use our model to inform sign restrictions in a structural VAR analysis. We confirm the model narrative and our initial findings that both news and mining shocks significantly and persistently affect Bitcoin valuations.

Keywords: Bitcoin, Narrative approach, Electricity costs, Mining competition, Search frictions

Suggested Citation

Faia, Ester and Karau, Sören and Lamersdorf, Nora and Moench, Emanuel, On the Transmission of News and Mining Shocks in Bitcoin (September 2019). Proceedings of Paris December 2019 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3478510 or http://dx.doi.org/10.2139/ssrn.3478510

Ester Faia (Contact Author)

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Sören Karau

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Nora Lamersdorf

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Emanuel Moench

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
+49 69 95662312 (Phone)

HOME PAGE: http://https://www.bundesbank.de/en/emanuel-moench

Goethe University Frankfurt - Department of Money and Macroeconomics ( email )

Germany

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