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Is the Bitcoin price dynamics economically reasonable? Evidence from fundamental laws

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  • Kristoufek, Ladislav

Abstract

Dynamics of the Bitcoin price as the most prominent cryptocurrency is studied in the light of two fundamental economic laws — the Law of One Price and the Equation of Exchange. Utilizing the unprecedented data availability of Bitcoin statistics, we are able to construct a theoretical exchange rate base of the cryptocurrency with respect to the US dollar. Through the concept of statistical equilibrium verified by the cointegration relationship, we show several interesting points. First, the Bitcoin price dynamics is very well captured by the underlying transaction data which leads to a strong fundamental basis of the cryptocurrency. Second, several historical bubbles hit the confidence intervals around the fundamental price but then start their correction back to the equilibrium. Third, the fundamental price implied by the transaction data is not ever-increasing but reflects the ups and downs of Bitcoin utility in transactions. And fourth, our theory-implied fundamental price suggests that the current (December 2018) Bitcoin price is very close to its fundamental price estimated at around $3,500.

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  • Kristoufek, Ladislav, 2019. "Is the Bitcoin price dynamics economically reasonable? Evidence from fundamental laws," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 536(C).
    • Handle: RePEc:eee:phsmap:v:536:y:2019:i:c:s0378437119304856
    DOI: 10.1016/j.physa.2019.04.109
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    Cited by:

    1. Garcia-Jorcano, Laura & Benito, Sonia, 2020. "Studying the properties of the Bitcoin as a diversifying and hedging asset through a copula analysis: Constant and time-varying," Research in International Business and Finance, Elsevier, vol. 54(C).
    2. Hu, Yang & Hou, Yang (Greg) & Oxley, Les & Corbet, Shaen, 2021. "Does blockchain patent-development influence Bitcoin risk?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 70(C).
    3. Jiri Kukacka & Ladislav Kristoufek, 2023. "Fundamental and speculative components of the cryptocurrency pricing dynamics," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-23, December.
    4. Dunbar, Kwamie & Owusu-Amoako, Johnson, 2022. "Cryptocurrency returns under empirical asset pricing," International Review of Financial Analysis, Elsevier, vol. 82(C).
    5. Kristoufek, Ladislav & Bouri, Elie, 2023. "Exploring sources of statistical arbitrage opportunities among Bitcoin exchanges," Finance Research Letters, Elsevier, vol. 51(C).
    6. Ladislav Kristoufek, 2022. "On the role of stablecoins in cryptoasset pricing dynamics," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-26, December.
    7. Kubal, Jan & Kristoufek, Ladislav, 2022. "Exploring the relationship between Bitcoin price and network’s hashrate within endogenous system," International Review of Financial Analysis, Elsevier, vol. 84(C).

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