Bitcoin: Speculative Asset or Innovative Technology?

Journal of International Financial Markets, Institutions & Money, 2020

30 Pages Posted: 15 May 2020

See all articles by Adrian D. Lee

Adrian D. Lee

Deakin University - Department of Finance (Property and Real Estate)

Mengling Li

Nanyang Technological University (NTU)

Huanhuan Zheng

National University of Singapore

Date Written: April 21, 2020

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.

Keywords: Fintech; cryptocurrency; Tech-savvy investor; Heterogeneity; Speculation

JEL Classification: G12,G15

Suggested Citation

Lee, Adrian D. and Li, Mengling and Zheng, Huanhuan, Bitcoin: Speculative Asset or Innovative Technology? (April 21, 2020). Journal of International Financial Markets, Institutions & Money, 2020, Available at SSRN: https://ssrn.com/abstract=3581417

Adrian D. Lee

Deakin University - Department of Finance (Property and Real Estate) ( email )

70 Elgar Road
Melbourne, VIC 3125
Australia

Mengling Li

Nanyang Technological University (NTU) ( email )

21 Nanyang Link
SPMS-MAS-05-37
Singapore, Singapore 637371
Singapore

Huanhuan Zheng (Contact Author)

National University of Singapore ( email )

469C Bukit Timah Rd
NUHS Tower Block Level 7
Singapore, 259772
Singapore

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