Bitcoin: currency, commodity or technology platform?

Bitcoin has had quite a run of late. With some precipitous drops along the way, the cryptocurrency’s price had risen from US$1,000 at the start of 2017 to almost US$20,000 by mid-December, buoyed by CME Group’s launch of bitcoin futures as well as hedge funds entering the market and granting it legitimacy. While some warn of a bubble—including certain central bankers, who are considering how to regulate cryptocurrencies—others are hoping the ride continues. (January has been another volatile month, with the value dropping below US$9,300 on Jan. 18 before heading back above $11,000.)

In a paper published in January 2017, two Western University academics assessed cryptocurrencies’ volatility by examining the weekly returns of five different ones between September 2014 and August 2015.

PhD candidate Sha Wang and associate professor Jean-Philippe Vergne looked at how returns were affected by variables such as supply, public interest (using media coverage as a proxy) and cryptocurrencies’ innovation potential and technological upgrades.

The pair found that the innovation factor—such as efforts to fix and upgrade the software code—was the most “positively and significantly associated with weekly returns.”

“Strictly speaking, this study shows that cryptocurrency is neither currency nor commodity,” they wrote. Instead, bitcoin and its ilk should be treated as technology platforms rather than as just money.

As for other factors, media buzz had a negative association with weekly returns. The researchers reasoned that buzz could scare risk-averse investors and thus drive prices down. (It remains to be seen whether this still applies to the unprecedented buzz that accompanied gains in late 2017.)

Strangely, the study found that, unlike with traditional currency, supply increases are positively correlated with cryptocurrency returns. A short-term increase in supply may lead cryptocurrency holders to reinforce their positions, the study said, and that display of confidence could incite others to buy in, boosting returns.

Overall, the researchers found the industry was “much more mature, and much less speculative” than many think.

Read the full paper, “Buzz Factor of Innovation Potential: What Explains Cryptocurrencies’ Returns?” published in PLOS ONE here.

Mark Burgess

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Mark was the managing editor of Advisor.ca from 2017 to 2024.