Robust drivers of Bitcoin price movements: An extreme bounds analysis

Abstract

There is a growing stream of empirical research that endeavors to identify the influential variables contributing to the price formation of cryptocurrencies and, in particular, Bitcoin. However, results of those studies generally remain inconsistent in terms of not only the true combination of factors that affect Bitcoin prices, but also the nature of effects (positive vs. negative) that each individual factor has on the price behavior. The present study investigates the robustness of a wide variety of candidate determinants that have been the focus of attention in relevant literature. Our inquiry relies on the extreme bounds analysis (EBA), which is a type of large-scale sensitivity analysis capable of addressing model uncertainty issues. The findings suggest that crypto market forces of supply and demand, public interest, and economic policy uncertainty are the only variables robust to all possible variations in the conditioning information set. Our evidence argues in favor of the predominance of cryptocurrency-related determinants over global macroeconomic and financial ones in explaining Bitcoin price movements.