“Virtually” Not A Currency: An Analysis of Bitcoin’s Price as Futures Trading Drives It Into The Rational Market

Abstract

The main purpose of this paper is to demonstrate that the structural changes and developments in the Bitcoin market over the latter half of 2017 into 2018 created a more rational relationship between economic and technological determinants of Bitcoin’s price. To achieve this, the analysis uses an Autoregressive Distributed Lag (ARDL) model and corresponding bounds test for pricing data on Bitcoin, performing regressions on the macroeconomic determinants, technological factors, and speculative metrics that comprise the main drivers of Bitcoin’s price. To isolate the driver of structural change in the market, the time series data is separated into periods prior to the launch of Bitcoin futures (11/01/2015 - 12/16/2017), and data after the futures launch (12/17/2017 - 3/31/2018). The ARDL model employed allows for simultaneous long-term and short-term analysis of the regressors considered, and interesting results were demonstrated. It is shown that when the market is split between the early and late market, the late market speculative factors are less significant in explaining the price movement, and technological factors demonstrate a more influential role. The regressions identify links between Bitcoin and the US and Japanese markets and subsequent analysis considers the predictive power of six other independent variables. While only limited data was available up until the time of publishing this study, additional analysis will become possible as more Bitcoin pricing data post futures becomes available over time, it is clear that the launch of the futures market served to reduce the speculative influence on Bitcoin pricing, introducing rationality.