What Has Been Driving Bitcoin Prices So Far?

Posted: Mar 19, 2018 1:04 PM
What Has Been Driving Bitcoin Prices So Far?

Many people have tried to analyze Bitcoin theoretically. What is it supposed to be? What could it be? That's fine as far as it goes, but I like to start with what we can know with a high degree of confidence, and what we can know with a high degree of confidence is the past. So let's start with that: what had Bitcoin acted like? How has it responded to various events so far? Even if we think it might change in character in the future, let's at least determine what it would change away from.

Here's the price chart for Bitcoin since 2013. It shows relative price stability until a 'hockey stick' take off point.

The problem with the chart above is that the recent price spike is so big that the chart had to be rescaled so much to accommodate that spike in such a way that earlier price movements are hard to see.

So, let's zoom in on a couple of time periods. For example, the following chart shows the time period during which two computer vendors, Dell and New Egg decided to accept Bitcoin as payment from customers.

What's interesting about the chart above is that Bitcoin prices do not act as if investors really care about the early acceptance of this cyber-currency as payment from these vendors. This indicates that vendor acceptance is likely not a driver. We don't show the data here, but the acceptance by Overstock.com also was consistent with the idea that Bitcoin is not highly responsive to vendor recognition.

Then what does move Bitcoin prices? Answer: in general it has responded to government policies. For example, when the European Union signaled that it would treat Bitcoin as a currency rather than as a commodity (a policy favorable to Bitcoin), the cyber-currency reacted very positively. See the chart below:

But before you get too confident about clocking the true inner dynamics of Bitcoin price fluctuations, take a look at how it responded to what seemed to be a very positive announcement from the government of Japan.

The reaction is somewhat muted. A small movement upwards right after the announcement, a solid sell-off afterwards, than a longer term bull market, but not a wild bull. So maybe Bitcoin doesn’t care as much about government as other data points show. Or maybe it is responding to an ambiguous signal about a possible future policy shift, not a take it to the cyber-bank actual policy change.

The bottom line is that Bitcoin price movements are more consistent with the idea that it is trying to get the green light from governments than it is with the idea that it is trying to get the green light from businesses. This undermines the idea that, at least so far, Bitcoin is an outlaw currency which is trying to uber it's way around the old world of governments and central banks. So far, it's fortunes have been tied to the idea that it will take its place among the legal tender currencies of the world.

If you'd like more detail, watch the short (a bit more than 7 minutes) course that I put together on Bitcoin advance price dynamics for beginners.