Demand Based Bitcoin Pricing

Abstract

I study investor-level data of all bitcoin flows from 2009 to 2021 and show that the market is highly inelastic: A $1 demand shock in the bitcoin market cause a change in the market cap of $3. I find that systematic demand shocks shared by all investors explain 40% of contemporaneous bitcoin return variation, while idiosyncratic demand shocks explain 6%. My findings imply that even small demand shocks cause large price changes and shed new light on the origins of bitcoin return fluctuations. My results provide further support for the inelastic market hypothesis from Gabaix & Koijen (2022b).