What is driving crypto prices?

One study comes to the conclusion: It depends on what the respective blockchain is designed for. The database, however, has its pitfalls.

Is it scarcity that drives the price of bitcoin?  A study finds evidence.

NAfter a record hunt of 13 months, the price of the crypto system Bitcoin came under massive pressure in mid-April. After a spectacular price crash of up to 30 percent on Wednesday, things are going up again on Thursday. The reasons are varied: Tweets from Elon Musk, WeChat messages from the Chinese National Bank. But these are only occasions that trigger individual reactions.

Much more interesting is the question: What actually determines the Bitcoin price in the long term? Occasionally, connections with the stock market are pointed out. Regression analyzes sometimes suggest very close connections, but they all suffer from the limited investigation periods and the high volatility of crypto prices.

The German fund company Iconic Funds, which manages crypto investments, has not only investigated for Bitcoin, but also 24 other crypto investments such as Ethereum or XRP, what the underlying value drivers could be.

In the case of Bitcoin, the authors Philipp Rosenbach and Robert Richter assumed that Bitcoin should be viewed like gold due to its inherent scarcity and that the ratio of the total amount available to the amount that is newly added (so-called stock flow ratio) could be a key driver . The halving dates are considered to be the main impetus when the remuneration for Bitcoin produced falls by half and Bitcoin becomes scarcer as a result.

BTC/USD

— (–)
  • 1T
  • 1W
  • 3M
  • 1J
  • 3J
  • 5J

To the detailed view

The data shows that the price rose after the halving, albeit with some delay. However, the authors admit that due to the low market liquidity, only the two halves of 2016 and 2020 were significant and that the period under review was not sufficient overall. Other factors were also examined, such as the number of active market participants, bitcoin creation requirements, developer activity, and social media mention.

None of the factors is a sufficient explanation: For example, the development of the number of market participants does not match the recent bull market. The requirements for the creation even shows no connection at all. At first glance, it seems surprising that no influence from social media is seen either. But, the study says, over the years more and more other digital systems such as Ether or XRP have come onto the market.

As far as many other crypto systems are concerned, Rosenbach and Richter come to the conclusion that the Bitcoin price has a significant influence on them, especially on systems designed as payment coins, even if these were not Bitcoin spin-offs . The same applies to rental products such as Compound.

On the other hand, if you look at Ethereum, the number of verified “Smart Contracts” is the most important factor, which fits in with the fact that this is not about scarcity, but about building an open network as the basis for numerous applications. The influencing factors generally varied according to the design of the respective blockchain.