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Brave New World? Bitcoin is not the New Gold: Understanding Cryptocurrency Price Dynamics

Author

Listed:
  • Sangyup Choi

    (Yonsei Univ)

  • Junhyeok Shin

    (Yonsei Univ)

Abstract

While the many commonalities shared by Bitcoin and gold raise a question of whether Bitcoin is a safe-haven like gold, relevant empirical evidence to date is mixed. Unlike existing empirical studies, we derive a simple estimable model of Bitcoin price dynamics from the quantity equation, which allows for structural interpretation of our findings; we then estimate the dynamic effects of macro factors, including income, inflation, and interest rates on Bitcoin prices at a weekly frequency. Unlike gold, Bitcoin prices are vulnerable to financial risk or uncertainty shocks, which is inconsistent with safe-haven quality. When the empirical model is augmented with Bitcoin-specific variables, such as its supply, transactions, and velocity, a major share of Bitcoin price dynamics is explained by these variables. We also find an interesting nonlinearity in the drivers of Bitcoin price dynamics between bullish and bearish market: the role of Bitcoin-idiosyncratic shocks increases when it appreciates, while the effects of macro factors dominate when it depreciates.

Suggested Citation

  • Sangyup Choi & Junhyeok Shin, 2020. "Brave New World? Bitcoin is not the New Gold: Understanding Cryptocurrency Price Dynamics," Working papers 2020rwp-167, Yonsei University, Yonsei Economics Research Institute.
    • Handle: RePEc:yon:wpaper:2020rwp-167
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    References listed on IDEAS

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    Cited by:

    1. Karau, Sören, 2021. "Monetary policy and Bitcoin," Discussion Papers 41/2021, Deutsche Bundesbank.
    2. David Cerezo S'anchez, 2022. "Zero-Knowledge Optimal Monetary Policy under Stochastic Dominance," Papers 2210.06139, arXiv.org.

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    More about this item

    Keywords

    Cryptocurrencies; Bitcoin; safe-haven; gold; quantity equation; Vector Autoregressions;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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