On- and off-chain demand and supply drivers of Bitcoin price

Abstract

Abstract Around three-quarters of Bitcoin transactions occur off-chain. While most empirical studies focus exclusively on on-chain transactions, only few papers analyse off-chain transactions. The empirical evidence of Bitcoin market considering both types of trading strategies remains limited. This paper is one of the first to present an empirical analysis of both on- and off-chain demand and supply-side factors and their short- and long-run relationship with the Bitcoin price. Employing the ARDL approach with daily data from 2019 to 2024, we demonstrate a differentiated contribution of on-chain and off-chain drivers to the Bitcoin price. In the long-run, off-chain demand pressures have a significant relationship with the Bitcoin price. In the short-run, both off-chain demand and supply factors are statistically significantly related to the Bitcoin price. The relationship between blockchain transactions and the Bitcoin price is also present, albeit likely operating through a different channel than off-chain trades. These findings confirm the dual nature of the Bitcoin market, in which price movements are related to both market fundamentals and speculative considerations captured by on- and off-chain trades, respectively.