Cryptocurrency price dynamics: An analysis of Bitcoin’s price driving factors

Abstract

This paper aims to enhance the understanding of which factors affect the price development of Bitcoin in order for investors to make sound investment decisions. Previous literature covers only to a small extent the highly volatile period during the last months of 2017 and in the beginning of 2018. We believe modelling price developments during this period will yield better estimations. To examine potential price drivers we use the Autoregressive Distributed Lag and Generalized Autoregressive Conditional Heteroscedasticity methods. Our study identifies the technological factor Hashrate as irrelevant for modelling Bitcoin price dynamics. This is due to the underlying code making the supply of Bitcoins time-elastic, and it is in contrast to previous literature which have included Hashrate. The empirical results of this paper further indicate that the price of Bitcoin is affected by the return on S&P 500 and Google searches, which is consistent with previous literature. In contrast to previous literature, we found VIX, Oil, Gold and Bitcoin transaction volume insignificant.