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Bitcoin: Speculative asset or innovative technology?

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  • Lee, Adrian D.
  • Li, Mengling
  • Zheng, Huanhuan

Abstract

We unite investment by speculators and tech-savvy investors with a heterogeneous agent model. While speculators seek to profit from extrapolating the price trends, tech-savvy investors trade based on the prospective value of Bitcoin, which is a function of factors that capture the market demand and technical supply of Bitcoin. Estimating the structural model, we find the coexistence of speculators and tech-savvy investors in the Bitcoin market. We further show that, regardless of the market states, tech-savvy investors consistently buy (sell) Bitcoin when its price goes below (above) the prospective value. However, speculators follow a momentum trading strategy in the high-market-volatility regime and switch to a contrarian strategy in the low-market-volatility regime. Our finding suggests that a significant fraction of tech-savvy investors value the potential of Bitcoin as an innovative technology. Incorporating heterogeneous investors yields better in-sample estimation efficiency and out-of-sample forecasting precision than models that consider only speculators or tech-savvy investors.

Suggested Citation

  • Lee, Adrian D. & Li, Mengling & Zheng, Huanhuan, 2020. "Bitcoin: Speculative asset or innovative technology?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 67(C).
    • Handle: RePEc:eee:intfin:v:67:y:2020:i:c:s1042443120300937
    DOI: 10.1016/j.intfin.2020.101209
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    8. Choudhary, Priya & Thenmozhi, M., 2024. "Fintech and financial sector: ADO analysis and future research agenda," International Review of Financial Analysis, Elsevier, vol. 93(C).
    9. Lee, Kangsan & Jeong, Daeyoung, 2023. "Too much is too bad: The effect of media coverage on the price volatility of cryptocurrencies," Journal of International Money and Finance, Elsevier, vol. 133(C).
    10. Shimeng Shi, 2022. "Bitcoin futures risk premia," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(12), pages 2190-2217, December.
    11. Luo, Di & Mishra, Tapas & Yarovaya, Larisa & Zhang, Zhuang, 2021. "Investing during a Fintech Revolution: Ambiguity and return risk in cryptocurrencies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 73(C).
    12. Emmanouil M. L. Economou & Nikolaos A. Kyriazis, 2021. "Achieving Sustainable Financial Transactions under Regimes without a Central Bank—An Intertemporal Comparison," Sustainability, MDPI, vol. 13(3), pages 1-13, January.
    13. Shimeng Shi & Jia Zhai & Yingying Wu, 2024. "Informational inefficiency on bitcoin futures," The European Journal of Finance, Taylor & Francis Journals, vol. 30(6), pages 642-667, April.
    14. Zdenek Smutny & Zdenek Sulc & Jan Lansky, 2021. "Motivations, Barriers and Risk-Taking When Investing in Cryptocurrencies," Mathematics, MDPI, vol. 9(14), pages 1-22, July.
    15. Kyriazis, Nikolaos & Papadamou, Stephanos & Tzeremes, Panayiotis & Corbet, Shaen, 2023. "The differential influence of social media sentiment on cryptocurrency returns and volatility during COVID-19," The Quarterly Review of Economics and Finance, Elsevier, vol. 89(C), pages 307-317.
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    17. Tang, Tao & Wang, Yanchen, 2022. "Liquidity Shocks, Price Volatilities, and Risk-managed Strategy: Evidence from Bitcoin and Beyond," Journal of Multinational Financial Management, Elsevier, vol. 64(C).

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