Distrust and Cryptocurrency

Abstract

Cryptocurrency prices differ across countries, and these price deviations fluctuate widely. Our paper provides evidence that distrust toward domestic authorities can explain the dynamics of local cryptocurrency prices relative to the U.S. dollar price. The price deviation rises after an outbreak of a financial crisis, political scandal, or socioeconomic event that undermines confidence in the domestic government or economy. With panel regressions, we show that Bitcoin price deviations increase by 1.8% when the institutional failure index rises by one standard deviation. These price responses are much stronger in countries with lower trust levels and during periods with tighter capital controls.