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.
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