Brave New World? Bitcoin is not the New Gold: Understanding Cryptocurrency Price Dynamics

Abstract

While the many commonalities shared by Bitcoin and gold raise a question of whether Bitcoin is a safe-haven like gold, relevant empirical evidence to date is mixed. Unlike existing empirical studies, we derive a simple estimable model of Bitcoin price dynamics from the quantity equation, which allows for structural interpretation of our findings; we then estimate the dynamic effects of macro factors, including income, inflation, and interest rates on Bitcoin prices at a weekly frequency. Unlike gold, Bitcoin prices are vulnerable to financial risk or uncertainty shocks, which is inconsistent with safe-haven quality. When the empirical model is augmented with Bitcoin-specific variables, such as its supply, transactions, and velocity, a major share of Bitcoin price dynamics is explained by these variables. We also find an interesting nonlinearity in the drivers of Bitcoin price dynamics between bullish and bearish market: the role of Bitcoin-idiosyncratic shocks increases when it appreciates, while the effects of macro factors dominate when it depreciates.