The digital traces of bubbles: feedback cycles between socio-economic signals in the Bitcoin economy

What is the role of social interactions in the creation of price bubbles? Answering this question requires obtaining collective behavioural traces generated by the activity of a large number of actors. Digital currencies offer a unique possibility to measure socio-economic signals from such digital...

Full description

Saved in:
Bibliographic Details
Published in:Journal of the Royal Society interface 2014-10, Vol.11 (99), p.20140623
Main Authors: Garcia, David, Tessone, Claudio J., Mavrodiev, Pavlin, Perony, Nicolas
Format: Article
Language:English
Subjects:
Bitcoin
Bubbles
Commerce - trends
Communication
Economics - trends
Humans
Interpersonal Relations
Models, Economic
Regression Analysis
Social Interactions
Socio-Economic Signals
Socioeconomic Factors
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:What is the role of social interactions in the creation of price bubbles? Answering this question requires obtaining collective behavioural traces generated by the activity of a large number of actors. Digital currencies offer a unique possibility to measure socio-economic signals from such digital traces. Here, we focus on Bitcoin, the most popular cryptocurrency. Bitcoin has experienced periods of rapid increase in exchange rates (price) followed by sharp decline; we hypothesize that these fluctuations are largely driven by the interplay between different social phenomena. We thus quantify four socio-economic signals about Bitcoin from large datasets: price on online exchanges, volume of word-of-mouth communication in online social media, volume of information search and user base growth. By using vector autoregression, we identify two positive feedback loops that lead to price bubbles in the absence of exogenous stimuli: one driven by word of mouth, and the other by new Bitcoin adopters. We also observe that spikes in information search, presumably linked to external events, precede drastic price declines. Understanding the interplay between the socio-economic signals we measured can lead to applications beyond cryptocurrencies to other phenomena that leave digital footprints, such as online social network usage.
ISSN:1742-5689
1742-5662
DOI:10.1098/rsif.2014.0623