Abstract
Bitcoin is the world’s largest cryptocurrency by market capitalization. Bitcoin is also extremely volatile, and predicting the volatility of any currency or asset is one of the most fundamental tasks for anyone dealing with investment decisions and risk. In this paper we study Bitcoin volatility by looking at the link between the volatility in the Bitcoin market and the volatility in other related traditional markets, as well as the general risk level in the financial system. We also consider retail investor driven search volumes on Google, as a possible proxy for investor sentiment, which has been found to affect the price dynamics in the financial markets. Our main finding is a relatively strong positive link between Bitcoin volatility and search volumes on Bitcoin-related words on Google, particularly for the search word “bitcoin”. Overall, our results points at retail investors, rather than large institutional investors, being the major drivers of Bitcoin volatility.
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