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Analysis of Cryptocurrency Market and Drivers of the Bitcoin Price

Understanding the price drivers of Bitcoin under speculative environment

Written by Yasar Kaya

Paper category

Master Thesis


Business Administration>Finance




Master Thesis: Comparison of Cryptocurrency and Stock Market Before analyzing bitcoin price dynamics in depth, examples of the differences between cryptocurrencies and the characteristics of traditional markets (preferably stock markets) can help readers understand why such research is needed. Some facts are as follows: 1. Although stocks are usually traded in the country where they are registered, cryptocurrencies are universal and attract more investors around the world. 2. Although the stock market is supported by banks and governments, the cryptocurrency market is decentralized and there is no central governance; the cryptocurrency market is not regulated (or very limited), and the blockchain is a mechanism that assumes a centralized role. The fact that it is not centralized is a concern for investors. In turn, this situation can lead to higher volatility because investors do not believe that the cryptocurrency market is as safe as a stock market that is strictly regulated by the government and banks (Shehhiand Oudah, 2014). 3. The stock market is more resistant to market manipulation than the cryptocurrency market because it is regulated. For individuals who aim to speculate on prices on a regular basis in the presence of the FUD (Fear, Uncertainty, and Doubt) phenomenon, the cryptocurrency market is a better playground for them (Forbes, 2018). 4. In the stock market, investors use part of their investment for stock market expenses; brokerage fees, taxes, transaction fees and transfer fees. On the other hand, in the cryptocurrency market, these costs are either non-existent or small. This situation may be more attractive to investors, leading to relatively more turbulent markets (Shehhiand Oudah, 2014). 5. One of the main differences between the stock market and the cryptocurrency market is their profit and loss ratio. Investors need to be patient with stocks for profit, usually a slow process of months or even years. In contrast, investors who wish to make profits in a shorter period of time may choose cryptocurrency transactions that may be faster. This case is due to the volatility of the cryptocurrency market, and may also lead to greater losses for the same reason (Elendner & Trimborn, 2016). 6. The supply of Bitcoin and other cryptocurrencies is limited. Once there are 21 million Bitcoins in the market, Bitcoin algorithm mining will stop. In the case of stocks, the number of shares is unlimited, and the company can issue them at any time according to the company's financial rules. According to the principle of supply and demand, it is certain that the limited supply will lead to short supply at some time in the future. In turn, asset prices continue to rise. This situation may prompt investors to buy more cryptocurrencies with higher prospects for future returns (Elendner & Trimborn, 2016). 2.2 What are bubbles, collapses, and crises Throughout the history of speculative bubbles, the most important economists have conducted a lot of research on the definition of speculative asset bubbles, observing bubbles from various industries. As the most basic and succinct description, a bubble is “the price rises beyond the extended range and then implodes” (Kindelberger, 1978). Then, Eatwell and his colleagues (1987) improved this definition; a bubble is a sharp rise in the price of an asset or a group of assets in a related market in a continuous process. New investors. This defines investors as speculators, they are only "interested in the profit of asset trading, not in the use or profitability of the asset." They are the main players in the bubble and burst (Eatwell, Milgate, and Newman, 1987). As Garber (2000) explained; when the price of an asset systematically deviates from its rational reflection of its true value based on market fundamentals, bubbles are most likely to exist. Taking into account the "fundamental", it has always been the main asset valuation engine in theory, based on the cash flow, discount factor, and performance of the asset in the relevant market (comments from the company's balance sheet) (Garber, 2000). Fundamentals are a reliable source of long-term equilibrium prices, but random shocks are allowed to affect prices in the short term. According to this statement, when the price of an asset is not equal to its market fundamentals during the relevant interval, speculative bubbles will occur due to reasons other than random shocks. Prices that have increased exponentially in a relatively short period of time are unreasonable and are almost impossible to attribute to "fundamental" or random shocks. In addition, Rosser also mentioned that “the most fundamental problem is to determine what is'basic' (Rosser, 2000). This shows how challenging it is to recognize the existence of speculative bubbles. Siegel (2003) proposed the operational definition of asset bubbles: "The period of asset price rise (or fall) can be described as a bubble (or negative bubble) in a given future period of time. The period is defined by the duration of the asset and can prove to be inconsistent, ie , Given the historical risk and return characteristics of the asset at that time, more than two standard deviations from the expected return. Read Less