Investigation into the Market Viability of Bitcoin: Measuring the Digital Currency's Speculative Nature

Abstract

Ever since its creation by the presumed pseudonymous Satoshi Nakamoto, Bitcoin has garnered significant attention as an innovative online payment system. The purpose of this paper is to empirically confirm the existence of speculative nature within Bitcoin as posed in the previous literature, discover the degree to which the participation of a Bitcoin user is dependent on the speculative opportunities in the Bitcoin market and, accordingly, test Bitcoins chance against traditional currency. Using a panel data set from one of the largest Bitcoin traders in Asia, we find that $1 increase in arbitrage between market prices is associated with 0.1 more log-ins of users, thus confirming the existence of speculative nature among users. However, the paper also suggests that such a portion of speculative users might not be as much as dominating the entire user population. The findings of the paper show that there is considerable number of users who treat Bitcoin not as a short term investment vehicle, but as something that they intend to watch over for a longer period of time. Also, the findings report that the actual reason for Bitcoins incompetence as a form of currency against the conventional tools of trade may be attributable to its low level of network effects, not yet fully formulated.