The digital traces of bubbles: feedback cycles between socio-economic signals in the Bitcoin economy

Abstract

What is the role of social interactions in the creation of price bubbles? Answering this question requires obtaining collective behavioural traces generated by the activity of a large number of actors. Digital currencies offer a unique possibility to measure socio-economic signals from such digital traces. Here, we focus on Bitcoin, the most popular cryptocurrency. Bitcoin has experienced periods of rapid increase in exchange rates (price) followed by sharp decline; we hypothesize that these fluctuations are largely driven by the interplay between different social phenomena. We thus quantify four socio-economic signals about Bitcoin from large datasets: price on online exchanges, volume of word-of-mouth communication in online social media, volume of information search and user base growth. By using vector autoregression, we identify two positive feedback loops that lead to price bubbles in the absence of exogenous stimuli: one driven by word of mouth, and the other by new Bitcoin adopters. We also observe that spikes in information search, presumably linked to external events, precede drastic price declines. Understanding the interplay between the socio-economic signals we measured can lead to applications beyond cryptocurrencies to other phenomena that leave digital footprints, such as online social network usage.

The New Era of Financial Innovation: The Determinants of Bitcoin’s Price

“…Bouoiyour, Selmi, Tiwari, & Olayeni (2016) stated that bitcoin's price is determined by the long-term fundamentals, including the supply and demand fundamentals. The fluctuation in bitcoin's price is also influenced by the new adopters of bitcoin itself, or as can be said, the new users and it's spread by word of mouth (Garcia, Tessone, Mavrodiev, & Perony, 2014). The research by Polasik, Piotrowska, Wisniewski, Kotkowski, and Lightfoot (2015) found that the rising number of bitcoin users, whether they treat bitcoin as an investment or as a payment media, also drives the price of bitcoin.…”

Exploring Perceptions of Bitcoin Adoption: The South African Virtual Community Perspective

“…This research follows the methodology employed by Lee (2009) which looked at factors influencing the adoption of internet banking. Bitcoin adoption, like the adoption of internet banking, involves the acceptance of an innovative technology, along with social systems and personal characteristics (Bashir et al, 2016;Garcia et al, 2014;Grinberg, 2011;Lee, 2009). As with Lee (2009), this research employs two research streams, the information technology adoption theory and perceived risk theory, to develop the research model and hypotheses.…”

“…To achieve such aim, the following research questions are investigated: (1) This paper is based on a study by Lee (2009) which looks at factors influencing the adoption of internet banking. It is believed that, as with internet banking adoption, Bitcoin adoption involves the acceptance of an innovative technology along with the effects of social phenomena and personal characteristics (Bashir, Strickland, & Bohr, 2016;Garcia, Tessone, Mavrodiev, & Perony, 2014;Grinberg, 2011;Lee, 2009). This descriptive research used an online questionnaire for data collection from 237 South African members of virtual communities (VCs) and virtual investment communities (VICs).…”

On the return-volatility relationship in the Bitcoin market around the price crash of 2013

“…Other studies also show that Bitcoin price formation is subject to unique factors that substantially differ from that affecting conventional assets. These factors include internet search (see, among others, Kristoufek, 2013), word-of-mouth information on social media, and information on google trends (Garcia et al, 2014). Eisl et al (2015) concentrate on the benefits of adding Bitcoin to an equity portfolio.…”