A new research paper aims to understand bitcoin’s price fluctuations and usage patterns through empirical analysis. Notably, the work finds a positive link between media attention and the value of the cryptocurrency.

“The rise of bitcoin has generated interest from the media and scientific community. However our knowledge of this innovation is still insufficient, particularly when examined from perspectives of finance and economics,” the study says.

To address this gap, the researchers conducted two complementary empirical investigations. The first aimed to clarify the factors affecting the rate of return on investment in bitcoin, while the second examined the sales of merchants who have decided to accept bitcoin as a form of payment.

The work, titled Price Fluctuations and the Use of Bitcoin: An Empirical Inquiry, is the result of a collaboration by Michal Polasik and Anna Piotrowska, two researchers from Poland’s Nicolaus Copernicus University’s finance department; Tomasz Piotr Wisniewski and Geoffrey Lightfoot from the University of Leicester School of Management; and Radoslaw Kotkowski, an employee of the Polish Bank Association whose research was conducted independently and is associated with the Warsaw School of Economics.

Lightfoot told CoinDesk that the article is to be submitted to a peer-reviewed journal and that currently the authors are collecting comments from colleagues before the final submission.

According to the authors, their work “enriches and verifies earlier theoretical considerations with data, and is one of the first empirical attempts to model the bitcoin economy”.

Chicken-and-egg scenario

The team’s primary objective was to discover what determines bitcoin’s value, using data pulled from CoinDesk’s Bitcoin Price Index.

While constructing the list of potential drivers, the researchers considered standard macroeconomic controls, global stock market fluctuations, and the number of transactions conducted with bitcoin, as well as measures designed to gauge its popularity. These included the number of English-language articles listing the word ‘bitcoin’, as well as the number of Google searches carried out for the same term.

The authors worked with the assumption that popularity drives price changes, but it could be that the opposite is true, they say, particularly when there is a spike in the price. After allowing for this possibility in the analysis, though, the researchers concluded their initial assumption was correct.

They state:

“Our results indicate that popularity of this cryptocurrency is one of the main factors driving the price. We observed that returns tend to be elevated whenever newspaper articles mention bitcoin more frequently and whenever the number of people searching for it on Google increases.”

According to the data, a 1% increase in the number of articles mentioning bitcoin raises returns by around 30 ‘basis points‘ (each being 100th of 1%). A similar rise in Google searches increases returns by about 50 basis points.

To further attempted to assess whether the price performance of bitcoin depends on its liquidity, the researchers collected data on the change in total number of transactions on the blockchain.

“By focusing on price formation, we discover that bitcoin returns are driven primarily by its popularity and the transactional needs of its users,” say the authors. At the same time, they add, bitcoin is “not well integrated with global stock markets and the macroeconomy presumably because it is currently a relative newcomer”. Thus, the link with globals stocks was not found to be significant. Sales breakdown The second major part of the study involved the survey of legal, English-speaking, bitcoin-accepting businesses. In total, 108 companies from 35 countries responded with information. The paper reads: “Analysis of traders that operate outside the law is likely to be highly unreliable, both because they are difficult to identify and, even if found, will be unlikely to voluntarily participate in such a survey.” The data indicated that the value of transactions carried out using bitcoin was on average 31% of sales, with just over half of the surveyed companies registering only a small portion of sales (up to 10%) in the digital currency. However, just over a quarter of merchants claimed that over 81% of their sales were conducted with bitcoin. “This group presumably includes organisations that have built their business model around the use of bitcoin,” the paper adds. The authors also found that concluded that the cryptocurrency portion of trade was higher for startups (less than three years old) than for presumably more established merchants who maintain brick-and-mortar outlets. Additionally, customers’ knowledge of bitcoin (as estimated by the merchant) was also a factor: the more buyers knew about the cryptocurrency, the higher the proportion of bitcoin sales.

Obstacles ahead of bitcoin

The authors acknowledge that, according to some researchers, bitcoin has not yet reached critical mass and appears viable primarily as an alternative currency for online purchases. However, the research also takes account of its rapid proliferation.

“The network of entities that accept bitcoin is expanding rapidly and there is a burgeoning technical infrastructure that can ameliorate the problem of exchange rate volatility,” the report says.

With this in mind, the paper points to a number of obstacles that stand in bitcoin’s path to widespread acceptance.

“Perhaps the biggest is the legal status of the cryptocurrency, with some countries maintaining an outright ban while others heavily restricting its use. Alongside this, there is considerable confusion as legislators attempt to determine its status for tax purposes – even within the EU countries there is no common approach.”

This said, the authors’ view on bitcoin’s potential role in the global economy is perhaps best summarised in the study’s concluding paragraph:

“Bitcoin is a fascinating innovation, which through its technical possibilities has the potential to engender significant changes to our understanding of the financial system and of the essence of money … Time will tell as to whether the benefits will outweigh the shortcomings, and whether adoption will become widespread, or remain limited to narrow niches and the shadow economy.”

More analysis to come

When asked about how the paper compares to another recent study that linked bitcoin price movements to search and media interest, Lightfoot said the two works have certain common features.

“It’s a good paper,” Lightfoot told CoinDesk. “I think both of our papers agree on the importance of publicity as a driver for bitcoin price and returns, although we draw out different implications, since we also call upon our survey of merchants accepting bitcoin.”

What makes the latest research original, he said, is the survey of merchants.

“We’ll reflect further on it and draw some further parallels in the next version of our paper,” Lightfoot added.