How Blockchain Network Factors and Market Forces Determine Bitcoin Returns

1. I now include one recommendation in the abstract as suggested by the second reviewer. Please refer to the last sentence of the abstract.

2. I added another paragraph (i.e., paragraph 7) in the introduction to explicitly capture the main contribution.

3. The suggestions for future research is now included in the conclusions (see paragraph 2 of the conclusions).

4. All the references are checked, and they now follow a uniform style

5. The discussion was also made more explicit to reflect how it relates to existing evidence

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The creation of distributed ledgers technologies spirals secured peer-to-peer interactions that pave way for the invention of Bitcoin. Since its invention, the price of Bitcoin has exhibited excessive volatility and has attracted increasing attentions. The study considers the isolated influence of network activities, mining (technology) and market information as fundamental drivers of bitcoin prices. A long-term equilibrium and short-term dynamic relationship is confirmed amongst endogenous system’s variables in the VEC Model. This suggests that any deviation from the equilibrium dynamics due to perturbations of market forces (bitcoin supply and trade volume), mining information (network difficulty, Hashrate and transaction fees) as well as the network activity (confirmed payments and users adoptions) would be minimised. The model explains that the cointegration relationship has a reverse adjustment effect on bitcoin return. This justifies why Bitcoin price, and by implication the return, continues to experience different massive run-up, spiky protrusions, resistance, reversals, strong supports and consolidations in the short. Amongst others, the study recommends that there should be increase in regulation to curb excessive fluctuations that can cause significant loss to the returns and discourage digital investors.