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

TL;DR

This paper analyzes both on-chain and off-chain demand and supply factors influencing Bitcoin's price, revealing that off-chain demand significantly impacts long-term price, while on-chain demand affects short-term fluctuations.

Contribution

It provides one of the first comprehensive empirical analyses of both on- and off-chain drivers of Bitcoin price using daily data from 2019 to 2024.

Findings

Off-chain demand pressures significantly influence long-term Bitcoin price.

Both demand and supply factors impact Bitcoin price in the short run.

On-chain demand pressures are statistically significant in both long- and short-term.

Abstract

Around three quarters of Bitcoin transactions take place off-chain. Despite their significance, the vast majority of the empirical literature on cryptocurrencies focuses on on-chain transactions. This paper presents one of the first analysis of both on- and off-chain demand- and supply-side factors. Two hypotheses relating on-chain and off-chain demand and supply drivers to the Bitcoin price are tested in an ARDL model with daily data from 2019 to 2024. Our estimates document the differential contributions of on-chain and off-chain drivers on the Bitcoin price. Off-chain demand pressures have a significant impact on the Bitcoin price in the long-run. In the short-run, both demand and supply drivers significantly affect the Bitcoin price. Regarding transactions on the blockchain, only on-chain demand pressures are statistically significant - both in the long- and short-run. These findings confirm the dual nature of the Bitcoin price dynamics, where also market fundamentals affect the Bitcoin price in addition to speculative drivers. Bitcoin whale trading has less significant impact on price in the long-run, while is more pronounced contemporaneously and one-period lag.