This paper studies the Bitcoin price formation by considering both the traditional determinants of currency price, e.g. market forces of supply and demand, and Bitcoin-specific factors, e.g. digital currency’s attractiveness for investors.

Using daily data for five years (2009-2014) and applying time-series analytical mechanisms, the paper explores market forces of supply and demand and Bitcoin’s attractiveness for investors. These both have a significant impact on Bitcoin price formation. Due to a growing market share, a rapidly increasing price of Bitcoin and its high price volatility, there is an increasing interest among users and economists in understanding the Bitcoin system in general and its price formation in particular.

The findings explored in this paper offer to a better understanding of the determinants behind the enormous Bitcoin’s price fluctuations experienced in the recent years. A desirable property of any monetary mean is that it holds its value over short-to-medium periods of time, in order not to create distortion when used as a medium of exchange in transaction.

Download the paper to find out more and whether or not Bitcoin is successful as a monetary value. Understanding the price formation of Bitcoin is highly relevant both from a general monetary policy point of view and from a Bitcoin’s ability to serve as a medium of exchange for global economy’s point of view.