The Price of Bitcoin

As promised in my last post, here is another guest post. This was written by Elliott Killian; to see more of his writing, check out his blog here:  http://elliottkillian.com/


The price of bitcoin for the past eight years has been very volatile ranging between less than one US dollar to over one thousand US dollars. Because of this drastic change, many ask: “What is Bitcoin?”. Is it a currency? A Technology? An investment tool? Or a scam? To answer these questions we have to examine how people use and value Bitcoin. A paper by Pavel Ciaian, Miroslava Rajcaniova & d’Artis Kancs did just that. They looked into the factors behind how bitcoin is priced. They wanted to know what the largest factor was. They examined the effects of the: global economy, number of learning about bitcoin (by views to the bitcoin Wikipedia page), attractiveness as an investment opportunity, and as a currency.

If you take any one theory each can not explain the pricing of bitcoin by itself. No factor by itself fully explains the price of bitcoin. If you split the price of bitcoin into different time periods at before or after October 2013 then these influences make more sense. This split represents early bitcoin when people were still learning about it from established bitcoin where people know what it was and were using it. For example, the number of people viewing the bitcoin site on Wikipedia searches did have an influence on the price of bitcoin when it was new, however, once it was established the number of people searching for bitcoin on Wikipedia had little effect on the price.

For the global economy, they found that it had no influence on the long-term price of bitcoin. This was similar to speculation. Speculation had little effect on the long-term price of bitcoin.

Here are my own thoughts after reading the paper and looking at bitcoin prices. I found that speculation had little impact surprising. Many people talk about using bitcoin as a get rich quick scheme by speculation. But speculation cannot deviate too far away from the true value of bitcoin measured by its use as a currency. Overall the use of bitcoin as a currency is what drives long term value and price of bitcoin. Simply put if more people use bitcoin the price goes up the fewer people use it the price goes down. What may be driving the price of bitcoin now is the black market online stores and legitimate businesses accepting bitcoin. In the future bitcoin may be used to as an alternative to currencies with high inflation or uncertain futures.

There is no one factor that determines the price of bitcoin. Multiple factors have affected bitcoin throughout its use. The long term price of bitcoin will ultimately be determined by how people use it. If more people use it as a currency the value and the price will increase. With this other factors such as speculation will have less of an impact on the price of bitcoin. Where ever the price of bitcoin goes you can know it is acting more and more like a currency than a speculative investment or scam.

Work cited
Pavel Ciaian, Miroslava Rajcaniova & d’Artis Kancs (2016) The economics of BitCoin price formation, Applied Economics, 48:19, 1799-1815, http://dx.doi.org/10.1080/00036846.2015.1109038