The Bitcoin as a Virtual Commodity: Empirical Evidence and Implications

Abstract

The present work investigates the impact on financial intermediation of distributed ledger technology (DLT), which is usually associated with the blockchain technology and is at the base of the cryptocurrencies' development. "Bitcoin" is the expression of its main application since it was the first new currency that gained popularity some years after its release date and it is still the major cryptocurrency in the market. For this reason, the present analysis is focused on studying its price determination, which seems to be still almost unpredictable. We carry out an empirical analysis based on a cost of production model, trying to detect whether the Bitcoin price could be justified by and connected to the profits and costs associated with the mining effort. We construct a sample model, composed of the hardware devices employed in the mining process. After collecting the technical information required and computing a cost and a profit function for each period, an implied price for the Bitcoin value is derived. The interconnection between this price and the historical one is analyzed, adopting a Vector Autoregression (VAR) model. Our main results put on evidence that there aren't ultimate drivers for Bitcoin price; probably many factors should be expressed and studied at the same time, taking into account their variability and different relevance over time. It seems that the historical price fluctuated around the model (or implied) price until 2017, when the Bitcoin price significantly increased. During the last months of 2018, the prices seem to converge again, following a common path. In detail, we focus on the time window in which Bitcoin experienced its higher price volatility; the results suggest that it is disconnected from the one predicted by the model. These findings may depend on the particular features of the new cryptocurrencies, which have not been completely understood yet. In our opinion, there is not enough knowledge on cryptocurrencies to assert that Bitcoin price is (or is not) based on the profit and cost derived by the mining process, but these intrinsic characteristics must be considered, including other possible Bitcoin price drivers.

A systematic literature review on the determinants of cryptocurrency pricing

“…, 2020). Nevertheless, Baldan and Zen (2020) argued that profits and costs were not the factors driving Bitcoin pricing. One possible explanation is that there is insufficient evidence to support the association between Bitcoin price and mining costs.…”

“…It is well known that the cryptocurrency market is unregulated and highly speculative (Hameed & Farooq, 2017). If private cryptocurrencies widely enter the market as public forms of currency, this will likely encourage money laundering and financial crimes that will significantly affect monetary policy and financial stability (Baldan & Zen, 2020). Therefore, regulators have a requirement to understand the potential factors that would induce economic crisis, expressed as the influential factors of cryptocurrency pricing.…”

“…Chico-Frias (2021) confirmed this impact by demonstrating that mining costs were positively related to cryptocurrency pricing, as Bitcoin mining consumes electricity (Lamothe-Fern andez et al, 2020). Nevertheless, Baldan and Zen (2020) argued that profits and costs were not the factors driving Bitcoin pricing. One possible explanation is that there is insufficient evidence to support the association between Bitcoin price and mining costs.…”

Impact of commodities and global stock prices on the idiosyncratic risk of Bitcoin during the COVID-19 pandemic

“…Graf (2014) makes a convincing argument that Bitcoin is a form of "pure" commodity money that, thanks to its intangible nature, takes the same role as commodity-backed fiat monies that have existed through history. Baldan and Zen (2020) and Hayes (2019) reinforce this argument by arguing that Bitcoin can be treated as a "virtual commodity" because it can be produced (Bitcoin miners) and can be acquired by individuals in different marketplaces, which is very similar to the process in which physical commodities are produced and traded. However, there is evidence that, even though Bitcoin theoretically shares similar characteristics with the commodities market, it behaves as a unique asset class in its own right.…”

Rapid Depreciation of Cryptocurrencies and Suicide: A Case Report

“…Bitcoin is one of the most popular instruments in the world, also called virtual money or cryptocurrency in terms of market size. Bitcoin is the first new currency to acquire popularity a few years after its launch, the largest cryptocurrency on the market, and its pricing also seem unpredictable (1).…”