Research project proposal Part 1:
Part of the reason I have started this newsletter and intend to make video content oriented around Bitcoin is to keep myself accountable to create more than I consume and to build a bank of work that may help with future endeavours. ]
I am focussing my final research project on making a case for Bitcoin and I thought I’d share parts of my proposal and research findings as I go. Hopefully this may be marginally interesting to some but will also push me to write and get it finished.
What is Bitcoin?
In response to the 2007 - 2008 financial crisis, Satoshi Nakamoto launched Bitcoin (BTC) in 2009. Bitcoin is a form of digital currency (Nakamoto, 2009). It is not within this paper's parameters to fully explain Bitcoin's technical aspects. However, an overview of BTCs main features benefits the rest of the report.
BTC is designed using open-source software accessible to all and has no central authority meaning it has no board of directors nor registered legal entity. BTC uses blockchain technology to create an immutable public ledger. BTC is a peer-to-peer payment network that is censorship resistant and removes the need for a centralised authority; therefore, trust-less. The BTC network is secured via a network of decentralised computers known as 'nodes'. Nodes verify transactions and individually store a copy of the BTC ledger. BTC has a maximum supply of 21 million and is divisible up to eight percentile points, known as Satoshis. BTCs are created via a process known as mining which is the process of solving complex mathematical equations using significant computational power (Dodd, 2018).
Since 2009, BTC has attracted much attention in the mainstream media and has experienced significant valuation volatility compared to traditional markets. Research shows that 2.5 billion people regularly read hard copies of newspapers, and 60 million read them digitally. Due to technological advancements in artificial intelligence (A.I.) and machine learning, news sentiment is now a credible and essential financial market factor and plays a significant role in BTC volatility (Sapkota, 2022).
Due to BTCs popularity and current adoption rates, it has been accepted as a form of payment by more than 19,000 physical retailers worldwide (Suardi, et al., 2022). BTC is an important innovation that can play an important role in e-commerce and many other sectors (Polasik, et al., 2015). However, due to BTCs volatility, it is highly unlikely, if not impossible, to imagine that BTC will ever replace fiat currency or even become mainstream (Dodd, 2018).
'Network effect' relates to the number of people that have adopted BTC. The more people adopt BTC, the more valuable it becomes; consequently, the network effect is an essential aspect of BTCs valuation. Although there is prior research regarding the media's influence on BTCs price volatility, the media's impact on the BTC adoption rate is less researched.
Problem to be investigated
This research proposal investigates the impact of mainstream media on BTC adoption. The Cryptocurrency market value peaked at $3.09 trillion in November 2021 and is currently valued at $930 billion in August 2022 (ICE data service, 2022). The Bitcoin market peaked in October 2021 with a value of $1.15 trillion and is now valued at $373 billion (ICE data service, 2022). From January 2018 to 2022, the BTC market dominance fluctuated between 35% - 70%. Since May 2021, it has ranged between 39% - 49%. The size of Bitcoins market capitalisation determines the behaviour of the entire cryptocurrency market (Nepp and Karpeko, 2022).
The network effect is a vital valuation characteristic of BTC. Therefore, it is logical to consider BTCs portrayal in the media as a potentially vital influence on whether new users adopt BTC.
Sapkota (2022), using a heterogeneous autoregressive research model (HARORV), argues that the news guides optimistic and pessimistic investors, but the positive financial sentiment is more responsible for BTC volatility. Similarly, Yu et al., (2021), explore the effects of news credibility on asset price valuations reporting that news credibility positively correlates with stock market returns. As the BTC market has grown, volatility connected to media hype is transmitted to other markets, such as the gold market (Zhanget al., 2022). As BTCs valuation increases, its price volatility and adoption pose a greater systemic risk which is why researching the media's influence on BTC adoption is important.