What Are The Main Drivers Of The Bitcoin Price? Evidence From Wavelet Coherence Analysis

27th October 2021

Specifically, we examine the relationship of Bitcoin prices with the Financial Stress Index and the gold price in Swiss francs. If the Bitcoin were truly a safe haven, it would be positively correlated with both utilized series, assuming that both FSI and gold price are good proxies of a safe haven. The Bitcoin’s success has ignited an exposition of new alternative crypto-currencies, usually labelled as “Altcoins”; however, none of these have been able to jeopardize the Bitcoin’s dominant role in the field. Of course, where there is an upside, there is often a downside as well. However, it should be noted that all of these issues can be a concern for standard cash currencies as well. To understand that, we need to first know how a cryptocurrency is different from a fiat currency (Indian Rupee, US Dollar, etc.). Altcoins often offer improvements on the Bitcoin model based on different policy objectives. Because of the disproportionate amount of investor and speculative demand for bitcoins relative to the currently limited adoption of bitcoins in retail and commercial markets, bitcoins are subject to price volatility. Retail and commercial acceptance of Bitcoins for payment could even contract in the future. Since the number of bitcoins is limited in circulation, new bitcoins are created at a decreasing rate. It means that demand must follow this level of inflation to keep the price stable.

Is Bitcoin Anonymous?

If a bitcoin owner sets the prices of their coin too high, no one will buy it. The owner will either have to reduce their price to a reasonable rate or just go without a sale. If the owner set the price too low, the coin will sell immediately and be taken off the market. Yes, most systems relying on cryptography in general are, including traditional banking systems. However, quantum computers don't yet exist and probably won't for a while. In the event that quantum computing could be an imminent threat to Bitcoin, the protocol could be upgraded to use post-quantum algorithms. What crypto aficionados do not appear to understand is that countries will take steps to protect their monetary systems and currencies and their ability to tax and manage the economy. The more people believe cryptocurrencies are money, the greater the risk of government intervention in this market. The emerging trend of official digital currencies is a sign of central banks fighting back. In late 2020, the top 100 wallets were estimated to own 13% of total bitcoin supply with most of the owners’ identities not known. It would therefore only take a few whale wallets to manipulate the bitcoin market, causing violent price moves. Huge price volatility has made bitcoin and cryptocurrencies unsuitable as store of value vehicles. Decentralized in the sense that there is neither a central administering authority nor central monitoring, while the crypto- prefix refers to its incorporation of principles of cryptography in its operation. Cryptography is key to Bitcoin —Bitcoin uses public and private keys to authenticate transactions, and the proof-of-work system used to verify transactions and maintain the block chain depends on cryptography. While Bitcoin is the first major cryptocurrency, Bitcoin alternatives, called altcoins, have mushroomed in recent years. These altcoins are essentially derivatives of Bitcoin, their developers having taken advantage of the open-source nature of Bitcoin as a base from which to code. Cash, credit cards and current banking systems widely surpass Bitcoin in terms of their use to finance crime. Bitcoin can bring significant innovation in payment systems and the benefits of such innovation are often considered to be far beyond their potential drawbacks. Some concerns have been raised that private transactions could be used for illegal purposes with Bitcoin. However, it is worth noting that Bitcoin will undoubtedly be subjected to similar regulations that are already in place inside existing financial systems. Bitcoin cannot be more anonymous than cash and it is not likely to prevent criminal investigations from being conducted. Additionally, Bitcoin is also designed to prevent a large range of financial crimes. Bitcoin is a growing space of innovation and there are business opportunities that also include risks. There is no guarantee that Bitcoin will continue to grow even though it has developed at a very fast rate so far. Investing time and resources on anything related to Bitcoin requires entrepreneurship.

How Much Will The Transaction Fee Be?

In this regard, Bitcoin is no different than any other tool or resource and can be subjected to different regulations in each country. Bitcoin use could also be made difficult by restrictive regulations, in which case it is hard to determine what percentage of users would keep using the technology. A government that chooses to ban Bitcoin would prevent domestic businesses and markets from developing, shifting innovation to other countries. The challenge for regulators, as always, is to develop efficient solutions while not impairing the growth of new emerging markets and businesses. In theory, this volatility will decrease as Bitcoin markets and the technology matures. Never before has the world seen a start-up currency, so it is truly difficult to imagine how it will play out. The first Bitcoin specification and proof of concept was published in 2009 in a cryptography mailing list by Satoshi Nakamoto. Satoshi left the project in late 2010 without revealing much about himself. The community has since grown exponentially with many developers working on Bitcoin. Many gold ATM machines and settlement mechanisms were installed around the world in the early 2010s as players were trying to promote the use of gold as an alternative to fiat money and a medium of exchange for daily transactions. However, they failed because of low public acceptance and the inconvenience of using gold for transactions. The popular narrative that bitcoin’s finite supply guarantees its value can play into concerns over central bank quantitative easing and what these QE programmes might mean for fiat money. However, security flaws have been found and fixed over time in various software implementations. Like any other form of software, the security of Bitcoin software depends on the speed with which problems are found and fixed. The more such issues are discovered, the more Bitcoin is gaining maturity. For now, Bitcoin remains by far the most popular decentralized virtual currency, but there can be no guarantee that it will retain that position. It is however probably correct to assume that significant improvements would be required for a new currency to overtake Bitcoin in terms of established market, even though this remains unpredictable. Bitcoin could also conceivably adopt improvements of a competing currency so long as it doesn't change fundamental parts of the protocol. The deflationary spiral theory says that if prices are expected to fall, people will move purchases into the future in order to benefit from the lower prices. That fall in demand will in turn cause merchants to lower their prices to try and stimulate demand, making the problem worse and leading to an economic depression. An artificial over-valuation that will lead to a sudden downward correction constitutes a bubble. Choices based on individual human action by hundreds of thousands of market participants is the cause for bitcoin's price to fluctuate as the market seeks price discovery.

Can Bitcoin Be Regulated?

However, there is a delay before the network begins to confirm your transaction by including it in a block. A confirmation means that there is a consensus on the network that the bitcoins you received haven't been sent to anyone else and are considered your property. Once your transaction has been included in one block, it will continue to be buried under every block after it, which will exponentially consolidate this consensus and decrease the risk of a reversed transaction. Each confirmation takes between a few seconds and 90 minutes, with 10 minutes being the average. If the transaction pays too low a fee or is otherwise atypical, getting the first confirmation can take much longer. Every user is free to determine at what point they consider a transaction sufficiently confirmed, but 6 confirmations is often considered to be as safe as waiting 6 months on a credit card transaction. It is however possible to regulate the use of Bitcoin in a similar way to any other instrument. Just like the dollar, Bitcoin can be used for a wide variety of purposes, some of which can be considered legitimate or not as per each jurisdiction's laws. However, the Bitcoin provides this type of information on daily basis, publicly and freely. We examine Bitcoin prices considering various aspects that might influence the price or that are often discussed as drivers of the Bitcoin exchange rate. Here, we address the price of the Bitcoin currency, taking a wider perspective. We focus on various possible sources of price movements, ranging from fundamental sources to speculative and technical sources, and we examine how the interconnections behave in time but also at different scales . To do so, we utilize continuous wavelet analysis, specifically wavelet coherence, which can localize correlations between series and evolution in time and across scales. In addition, the frequency domain viewpoint provides an opportunity to distinguish between short- and long-term correlations. We show that the time and frequency characteristics of the dynamics are indeed both worth investigating, and various interesting relationships are uncovered. Mining is the process of spending computing power to process transactions, secure the network, and keep everyone in the system synchronized together. It can be perceived like the Bitcoin data center except that it has been designed to be fully decentralized with miners operating in all countries and no individual having control over the network. This process is referred to as "mining" as an analogy to gold mining because it is also a temporary mechanism used to issue new bitcoins.

Real Regulation Of Virtual Currencies

Bitcoin users can also protect their money with backup and encryption. Fewer risks for merchants - Bitcoin transactions are secure, irreversible, and do not contain customers’ sensitive or personal information. This protects merchants from losses caused by fraud or fraudulent chargebacks, and there is no need for PCI compliance. Merchants can easily expand to new markets where either credit cards are not available or fraud rates are unacceptably high. The bitcoin market is still relatively small as compared to other industries. Therefore it does not take significant amounts of money to move the market price up or down. The Bitcoin technology - the protocol and the cryptography - has a strong security track record, and the Bitcoin network is probably the biggest distributed computing project in the world. Bitcoin wallet files that store the necessary private keys can be accidentally deleted, lost or stolen. Fortunately, users can employ sound security practices to protect their money or use service providers that offer good levels of security and insurance against theft or loss.

What If Someone Creates A Better Digital Currency?

The net results are lower fees, larger markets, and fewer administrative costs. Bitcoin is a consensus network that enables a new payment system and a completely digital money. It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. From a user perspective, Bitcoin is pretty much like cash for the Internet. Bitcoin can also be seen as the most prominent triple entry bookkeeping system in existence. According to Grinsted et al. , the series examined using the wavelet methodology should not be too far from a Gaussian distribution and primarily not multimodal. If the series are in fact multimodal, it is suggested that they be transformed to a uniform distribution and that quantiles of the original series, in turn, be analyzed. The inference based on the wavelet framework and the related Monte Carlo simulations based significance is then reliable. For this matter, we transform all of the original series accordingly, as most of them and particularly the Bitcoin price, are multimodal, and we thus interpret the results based on the quantile analysis.

• It is, however, not entirely ready to scale to the level of major credit card networks.
• The money supply works as a standard supply, so that its increase leads to a price decrease.
• Regulators from various jurisdictions are taking steps to provide individuals and businesses with rules on how to integrate this new technology with the formal, regulated financial system.
• The specialized equipment has led to the increasing costs of mining and a soaring mining hash rate and difficulty, which have gradually driven small miners away from the pools as mining became un-profitable for them.
• However, if the price is driven by speculation, volatility and uncertainty regarding the price, as well as the increasing USD value of transaction fees, can lead to a negative relationship.

Spending energy to secure and operate a payment system is hardly a waste. Like any other payment service, the use of Bitcoin entails processing costs. Services necessary for the operation of currently widespread monetary systems, such as banks, credit cards, and armored vehicles, also use a lot of energy. Although unlike Bitcoin, their total energy consumption is not transparent and cannot be as easily measured. Bitcoin is not a fiat currency with legal tender status in any jurisdiction, but often tax liability accrues regardless of the medium used. Alternatively, the increasing hash rate and the difficulty connected with increasing cost demands for hardware and electricity drive more miners out of the mining pool. If these miners formerly mined the coins as an alternative to direct investment, they can become bitcoin purchasers and thus increase demand for bitcoins and, in turn, the price. One possibility is that the cryptocurrency is restricted to a geographic area and no longer anonymous (e.g., connected to a passport number). With regard to accessibility, it is likely that obtaining bitcoins will be linked to online performance, such as Internet games, as Linden dollars in Second Life. Nxt-id.com's “MobileBio, biocloud, and Authentication and Identity Management Services” is an example of a means to identify people, something that is becoming increasingly important in view of safety. The near future will undoubtedly see a rise in the development of safely identifying people. Biometric identification is the future, whether through the voice, iris/eye, fingerprint, or eventually DNA. The Web site states “The Bitcoincard moves bitcoin economic interaction offline, which significantly expands both turnover and the target audience. But, most importantly, it makes the clustered local growth of a new free economy possible,” thus calling upon economic freedom of thought. The shortcomings of the bitcoin are the degree of difficulty, value fluctuations, lack of central supervision of the payment platform, and thus safety. New tools, features, and services are being developed to make Bitcoin more secure and accessible to the masses. Here, we provide a detailed description of all analyzed series together with their source links. The characteristics of variables are described as of the time of the analysis, i.e. The fact that they command a price and are tradable suggests that speculation would be their single most important ‘raison d’être’. Behind the scenes, the Bitcoin network is sharing a public ledger called the "block chain". This ledger contains every transaction ever processed, allowing a user's computer to verify the validity of each transaction. The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses, allowing all users to have full control over sending bitcoins from their own Bitcoin addresses. In addition, anyone can process transactions using the computing power of specialized hardware and earn a reward in bitcoins for this service. To learn more about Bitcoin, you can consult the dedicated page and the original paper. In economic theory, the price of a currency is standardly driven by its use in transactions, its supply and the price level. Either the time series for all of these variables are available or we are able to reconstruct them from other series; see the Methods section for more details. For a more detailed treatment of the partial wavelet coherence, we refer interested readers to Refs. Bitcoin is not universally accepted as a unit of account and a means of payment. Granted, many cryptocurrency payment apps have been created in recent years to promote its use. But none of them has made it to the core of the world’s daily transactions and payments , except for some underworld transactions. Is the most widely used digital currency, driven by the ease of transaction and the incentives to mine. This chapter details the fundamentals of technology behind Bitcoin network. Thus, the rise of cryptocurrencies can be seen as reflecting the anti-establishment movements in many countries since the 2008 GFC. Read more about ETH to BTC here. These supply limitations make cryptocurrencies unsuitable as legal tender because the static 'money supply' would deprive central banks of the ability to conduct countercyclical policy. Some advocates of the cryptocurrency suggest its price is rising because bitcoin is challenging gold’s standing as the one supra-currency, the asset to own when fiat currencies are being debased. Does bitcoin offer something unique as an emerging store of value, blending some of the benefits of technology and gold?. Every cryptocurrency trade automatically gets entered into a decentralised ledger that is not regulated or manipulated by a single entity. All transactions are secured by cryptography and it is available to everyone to view from any place at any time. In other words, its price is determined by how much someone is willing to pay for that bitcoin. The market sets the price of bitcoin as same as Gold, Oil, Sugar, Grains, etc. is determined. Bitcoin, like any other market, is subject to the rules of supply and demand. Bitcoin mining has been designed to become more optimized over time with specialized hardware consuming less energy, and the operating costs of mining should continue to be proportional to demand. This connection is even more stressed by the fact that the shorting of bitcoins is still limited. In Fig 5, we show that this connection does indeed exist, and the relationship is again present at high scales. Because most of the phase arrows point toward the northeast region, the Chinese volume leads the USD prices. However, as discussed above, the USD and CNY exchange volumes are strongly correlated, and at high scales, this is true for the entire analyzed period.