Abstract
The research seeks to contribute to Bitcoin pricing analysis based on the dynamics between variables of attractiveness and the value of the digital currency. Using the error correction model, the relationship between the price of the virtual currency, Bitcoin, and the number of Google searches that used the terms bitcoin, bitcoin crash and crisis between December 2012 and February 2018 is analyzed. The study also applied the same analysis to prices of Bitcoin denominated in different sovereign currencies traded during the same period. The Johansen (J Econ Dyn Control 12:231-254, 1988) test demonstrates that the price and number of searches on Google for the first two terms are cointegrated. This research indicates that there are strong short-term and long-term dynamics among attractiveness factors, suggesting that an increase in worldwide interest in Bitcoin is usually preceded by a price increase. In contrast, an increase in market mistrust over a collapse of the currency, as measured by the term bitcoin crash, is followed by a fall in price. Intense world economic crisis events appear to have a strong impact on interest in the virtual currency. This study demonstrates that during a worldwide crisis Bitcoin becomes an alternative investment, increasing its price. Based on it, bitcoin may be used as a safe haven by the financial market and its intrinsic characteristics might help the investors and governments to find new mechanisms to deal with monetary transactions.
Highlights
Concurrent with a rapid price appreciation, the increase in financial market interest in digital currencies and in Bitcoin in particular, as well as global integration of virtual networks, have prompted the emergence of new academic studies related to economic behavior of this new asset that has been inserted in the world financial market.Factors that make the asset extremely volatile to information and market variables include the absence of a centralized institution that controls and guarantees the value of Bitcoin and the understanding that its price is based on the belief that the virtual currency will continue its upward trajectory
The application of the Johansen cointegration test shows that the price curve and the lnbtc and lncrash variables are cointegrated, and the test rejects the null hypothesis of non-existence of a cointegration vector
The VEC model (VECM) proves to be more adequate than the Vector Autoregressive (VAR), with the insertion of the error correction terms to perform the long-term adjustment in the system
Summary
Factors that make the asset extremely volatile to information and market variables include the absence of a centralized institution that controls and guarantees the value of Bitcoin and the understanding that its price is based on the belief that the virtual currency will continue its upward trajectory. It seems that there are yet opportunities to get benefits from Bitcoin volatilities and its market inefficiencies (Bouri et al 2018). The findings are relevant for policymakers and monetary authorities in order to understand why people are seeing increasingly their interests to trade or hold Bitcoin.
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