Bitcoin is a peer-to-peer payment system (digital currency) that has attained wide popularity in the last couple of years. Two years back, the value of a bitcoin was around $5. But today, its value has increased to around $600. An economist, Ladislav Kristoufek at the Charles University in Prague, Czech Republic studied the factors that contributed to this dramatic price variation. He conducted a detailed data analysis to decipher the forces that caused the quick rise in value of the virtual currency, bitcoin.
Data Analytics to Determine the Price of Bitcoins
According to recent news, Kristoufek studied the link between bitcoin prices and some other financial benchmarks. Data processing helped him to identify the major factors that influenced the price rise of bitcoins.
The value of currency can be determined by the forces of supply and demand as well as the number of transactions involved at a particular point of time. Bitcoins indicate the exact number of transactions involved, unlike conventional currencies that do not provide much transparency with regard to the number of transactions and the number of dollars that are in circulation at any given time.
Data captured to identify the exact number of transactions are as follows:
- The total number of bitcoins in circulation
- The number of transactions (other than exchange transactions)
- Data of transaction available at exchanges, where people buy and sell bitcoins for other currencies
- The estimated number of new bitcoins mined during that day
He combined the existing data with his own technique of wavelet coherence analysis and extracted the price movement of bitcoins with other currencies such as greenback and Chinese renminbi.
Data mining results make it clear that, other than speculative work, conventional factors have also contributed to the rise of bitcoins. These conventional factors are:
- The use of bitcoins in trade
- The supply of the currency
- The price level of the currency (seemingly over or undervalued)
The rise in the price of bitcoins is yet another factor that has created significant interest in bitcoin mining. Moreover, the study makes it clear that speculation pushed the prices of bitcoins, both in the short term and long term. Through this study, the advantage of a totally transparent currency is brought home. If Bitcoin enters the mainstream and becomes a major force, by virtue of its transparency economists will be able to predict how it will perform in the real world.