Pricing cryptocurrencies : an analysis of the fundamentals of cryptocurrencies

Abstract

The main aim of this dissertation is to deduce the main fundamental components of cryptocurrency. In other words, finding out which components affect the inherent value of a cryptocurrency. While it is understood that this aim is far-fetched due to the lack of previous literature and theoretical background, this research should serve as a foundation on which future studies could expand upon. To achieve this a regression was run for a one-year period between 1st March 2017 to 28th February 2018 with the price of Bitcoin as the dependent variable and various fundamental variables and a technical variable as the explanatory ones. It is important to note that the aim of this dissertation was not to create an economically significant regression that could be used to explain any other period but rather to come up with the fundamental factors that influence the price of Bitcoin and use regressions and economic rationale to substantiate the relationship. Extensive testing was done on the regression to ensure that the CLRM assumptions are met.

While evidence to empirically deduce which fundamentals influence Bitcoin was mostly lacking, this thesis’ conclusions can be summed up into three. Usage of Bitcoin as a transitory currency is the one fundamental variable behind which there is a reasonable amount of evidence of its influence on the price of Bitcoin. Secondly, multicollinearity seems to be an issue with most of the variables suggesting that it is not due to coincidence. Lastly, it does not seem that negative events have a significant effect on the price of Bitcoin in the long run.

It is important to note that since there are consistent developments in Bitcoin and cryptocurrency with regards to new highs and lows as well as new regulatory regimes

among others, a cut-off date was set on the 28th of February. Therefore, all information below was reported on or prior to the date.