The Price Volatility of Bitcoin : A search for the drivers affecting the price volatility of this digital currency

Abstract: Created in 2009, the digital currency of bitcoin is a relatively new phenomenon. During this short period of time, it has however displayed a strong development of both price and trade volume. This has led to increased media attention, but also regulators and researchers have developed an interest. At this moment, the amount of available research is however limited. With a focus on the price volatility of bitcoin and an aim of finding drivers of this volatility, this study is taking a unique position. The research has its basis in the philosophical position of positivism and objectivism. This has shaped the research question as well as the construction of the study. The result is a describing and explaining research with a deductive research approach, a quantitative research method and an archival research strategy. This has in turn stimulated an extensive literature review and information search. Areas of discussion are microstructure theory, the efficient market hypothesis, behavioural finance and informational structures. Due to the limited amount of previous bitcoin research within the area of price volatility, the study has drawn extensively on research performed on more classical assets such as stocks. Nevertheless, when available, bitcoin research has been used as a foundation/reference and an inspiration. Reviews of academic literature and economic theories, as well as public news helped to identify the variables for the empirical study. These variables are; information demand, trade volume, world market index, trend and six specified events, occurring during the chosen sample period and included in the study as dummy variables. The variables are all analysed and included in a GARCH (1,1) model, modified following a similar research by Vlastakis & Markellos (2012) on stocks. This GARCH (1,1) model is then fitted to the bitcoin volatility registered for the sample period and is able thereby able to generate data of if and how the variables affect the bitcoin volatility. The test result suggests that five of the ten variables are significant on a 5 %-level. More specifically it suggests that information demand is a significant variable with a positive influence on the bitcoin volatility, something that corresponds to the literature on information demand and price volatility. This also relates to the events found significant, as they generated bitcoin related information. The significant events of the Cypriot crisis and the failure of the bitcoin exchange MtGox are thus specific examples of how information affects price volatility. Another significant variable is trade volume, which also displays a positive influence on the volatility. The last significant variable turned out to be a constructed positive trend, suggesting that increasing acceptance of bitcoin decreases its volatility.