Theories on the growth of BTC
Bitcoin is virtual money derived from mathematical cryptography and conceived as an alternative to government-backed currencies (Cheah & Fry, 2015). Even though it was operationalised in 2009, Bitcoin caught the attention of the mainstream investors only in 2012. At the global level, the sudden growth of Bitcoin happened in a brief span, say 10 years. The crypto market has since then had the first-generation, second generation and third generation of currencies, of which those in the third generation are still in their infancy (Hendrickson & Luther, 2021; Schilling & Uhlig, 2019). However, recently the crypto user base is dramatically increasing worldwide. Bitcoin and other digital currencies may have a sizeable long-term effect on both cash and payment systems (Brandvold et al., 2015). Cryptocurrencies embody innovative technology, high-security architecture, prosperity in functionalities, and investment opportunity as assets that make them attractive to computer scientists, venture capitalists, and investors (Klein et al., 2018). Hong et al. (2018) suggested that the factors that lead to the growth of cryptos are the extremely high costs associated with the use (medium of exchange and store of value) of fiat currencies and the extremely low costs associated with the use of the cryptos. Moreover, the failure of fiat currency in countries such as Zimbabwe and Lebanon has added to the popularity of the crypto movement. People started hearing about cryptocurrencies when Bitcoin came into the picture. Hence, it is often regarded as the father of cryptocurrencies, and all other cryptocurrencies are referred to as altcoins (Sovbetov, 2018). The recent news that El-Salvador has accepted BTC and officially adopted it as legal tender was a surprising and positive news to Bitcoin fans all over the world.
Pricing of Bitcoin
Cryptocurrencies do not have an underlying value such as fiat currencies, corporate stocks and bonds. The cryptocurrencies are more demand sensitive, so the market value depends more on how well known the currency is (Pärlstrand et al, 2015). Since its inception, Bitcoin has been the most popular cryptocurrency, so its market value too has been rising in an unprecedented manner. Since Bitcoin belongs to a global arena, its value is fundamentally identical across different markets. Therefore, the price is globally determined and cannot be influenced over a more extended period by the individual markets across countries.
Kapar and Olmo (2021) established a long-run relationship between Bitcoin and a set of variables with power to explain the dynamics of cryptocurrency using cointegration methods. Bitcoin is procyclin, driven by investors’ interest in cryptocurrency, and is positively correlated to the market portfolio. Nowadays, Bitcoin follows the trend exhibited by financial markets and cannot be considered as a purely alternative asset. The uncertainly of global economic policies have had both positive and negative causal impacts on Bitcoin returns. However, it cannot always be viewed as a new basket for eggs (Qin et al., 2021). The significant factors that affect Bitcoin pricing are returns on the S&P 500, NIFTY 50, SENSEX30 and other popular market indices.
Traditional asset valuation models fall short of effectively explaining recent developments in Bitcoin price. However, some of the financial models suggest that Bitcoin is currently overpriced (Pano & Kashef, 2020). Moreover, Minsky’s financial instability hypothesis (Beshenov & Rozmainsky, 2015) seems a better fit in explaining Bitcoin’s recent price developments than any of the proven economic theories available as mentioned by Joost van der BurgtFootnote 1. While examining the association of the Bitcoin price crash risk with economic uncertainty, it is evident that economic uncertainty displays a significant negative correlation with Bitcoin price crash risk. Research by Kalyvas et al. (2020)indicates that when economic uncertainty is high, the crash risk of Bitcoin is low. Moreover, the behavioural factors have insignificant relation with Bitcoin crash risk. In such cases, investors can hedge against the economic uncertainty influence of other financial assets by investing in the BTC market. The theory proposes that since the Bitcoin market is moving against the macro fundamentals of the economy, emotions are the primary determinant of demand of the Bitcoin market.
Investors ‘bias and price volatility of BTC
Bitcoin has unique risk-return characteristics, follows a different volatility process when compared with other assets, and is uncorrelated with other assets. Hence, Bitcoin’s excess returns and volatility have somewhat resembled a more speculative asset than gold or the U.S. dollar (Baur et al., 2018). The volatility of Bitcoin is extreme, and the prices fluctuate considerably over longer horizons and daily (Bariviera, 2017; Baur & Hoang, 2021). Bitcoin is about eight times more volatile than the stock market and close to 20 times more volatile than the U.S. dollar (Harvey, 2018). In this scenario, this statement of Harvey is significant, “finance, as we know it today, will be disrupted shortly; indeed, Bitcoins are the beginning of this disruption”.
Kraaijeveld and Smedt (2020), Wołk (2019), Pano and Kashef (2020), and Price and Burnie (2019)are of the opinion that the volatility of the cryptocurrency market is attributed to news, messages, and posts on social media. Since cryptocurrency is one of the new-age currencies, investors are more reliant on social media for speedy information than conventional media. Several authors such as Shen et al. (2019), Colianni et al. (2015), Pano and Kashef (2020), Kraaijeveld and Smedt (2020) etc., have examined the link between investor attention, Bitcoin returns, and its trading volume. Their sentiments analysis revealed the volatility by employing posts from Twitter as a measure of attention rather than Google Trends. The frequency and direction of tweets is a significant driver of next-day trading volume and realized volatility, further supported by linear and nonlinear Granger causality tests. Considering these facts, investor sentiments, emotions, and behavioural bias could be significant factors in the price movement of cryptocurrencies.
Status of qualitative research approach in Bitcoin market research
Qualitative analysis is not seen much in Bitcoin literature, even though investors think beyond the logic of theories while investing. During this pandemic situation of COVID-19, since everybody is panicking about the uncertain future, the influence of investors’ fear sentiment on Bitcoin price dynamics is unpredictable. Chen et al. (2020) and Ali et al. (2020) observed that during the period of market distress, Bitcoin behaves like traditional financial assets such as gold. Hence, this conceptualisation may not be desirable for investors to allocate resources to Bitcoin to reduce risk exposure. The actual BTC market has not served as a haven during the pandemic. However, the price of Bitcoin is mainly driven by investors’ interest in cryptocurrency and not by macroeconomic fundamentals or financial ratios (Kristoufek, 2018). Gurdgiev and O’Loughlin (2020) examined price dynamics of cryptocurrencies and found that they are influenced by the interaction between behavioural factors behind investor decisions and publicly accessible data flows. In this background, conducting a sentimental analysis is useful to understand the influence and direction of investor sentiment on the price direction of the BTC market.
Sentimental effect of Bitcoin prices
Sentiment analysis is the act of extracting and measuring the subjective emotions or opinions expressed in the text (Abraham et al., 2018). Its purpose is to conduct opinion mining to determine the writer’s attitude towards a particular item (Vijayaragavan et al., 2020). Recent sentiment analysis algorithms can detect positive and negative emotion strength in short informal texts with a reasonable degree of success (Dang-Xuan et al., 2013). Investors also use social media for posting their views, opinions, and feelings. Behavioral sciences and related scientific literature have investigated evidence of the relationship between social media and cryptocurrency price fluctuations. Apart from conventional social media such as Facebook and Twitter, several cryptocurrency forums such as ADVFN, Moon forum, Blackhat world, Bitcointalk, Crypto compare etc. are influencing the market in a significant manner. “Bitcointalk” is divided into several sections such as Bitcoin discussion, coin mining, technical help, and Bitcoin economics, where investors can share their views (Jawaheri et al., 2020). These social media and investors’ forums are to be examined by academicians for providing practical insights to the investors through sentimental analytics (Fernández Vilas et al., 2021).
The public uses Google as a search engine; thereby, Google can give insight into people’s interests, and it can provide that search data in the format of ‘Google Trends’. Abraham et al. (2018) and Urquhart (2018) found that previous day price volatility and search volume in Google Trends are significant drivers of attention of Bitcoin. Previous studies show a connection between Bitcoin price and the sentiment of the public. This is evident in the study of Ahn and Kim (2020)who found that returns on Bitcoin, trading volume, volatility, and signed jump variations are all strongly linked to investor dissatisfaction. Chen et al. (2020) learned that the Bitcoin price had been influenced by the Corona virus outbreak, and it gives a clear picture that fear sentiment can affect the Bitcoin price dynamics. Ahn and Kim (2020) attempted to establish a relationship between sentimental aspects and Bitcoin price volatility, but they took only two variables into consideration: attention and disagreement. Moreover, they ignored other behavioural factors and emotions.
Herding behaviour and Bitcoin price
Poyser (2019) argued that the price of Bitcoin has never been stagnant since its inception. The price reached the level of $60,000, but then saw a sudden fall to $30,000 during the period of May 2020. If we analyse the market trend, we can understand that the market nowadays is heavily reliant upon sentiments, behavioural biases, and emotions. These ups and downs of price are majorly due to the tweets and comments of some influential personalities such as Elon Musk, the CEO of Space X and Tesla. It is a clear example of herding bias and sentimental effect.
Chen et al. (2020) considered only the fear sentiment and the Bitcoin price in assessing the price dynamics. The influence of personalities such as Elon Musk who have millions of followers on Twitter and other social media platforms was not considered. It is clear from recent events that their tweets and posts do have a significant influence on the trading trend, volume, and price of cryptocurrencies. Elon Musk had tweeted in February 2021 about Bitcoin, which created a remarkable hike in its price. In May 2021, he tweeted about Dogecoin, another cryptocurrency, which influenced people to sell Bitcoin and invest in Dogecoin instead for a while. This shows how sentiments and emotions impact the BTC price.