What’s Driving Bitcoin? Factor Analysis Profiles, Part I

What makes tick? There are many theories, ranging from a digital-age store of value to the world’s greatest Ponzi scheme. Narratives are interesting and perhaps useful, but can we quantify Bitcoin’s risk betas with specificity? Let’s give it a try in a series of factor-analysis tests.

The idea of regressing Bitcoin’s price against a set of risk factors comes from a tweet by Fernando Vidal at 3Fourteen Research. Using a classification methodology focused on equity sectors, the modeling shows that financial stocks are the leading suspect to “explain” Bitcoin price changes.

Let’s dig into this a bit deeper by running a series of factor regressions using several sets of economic and markets’ indicators. As a starting point, we’ll use a set of ETFs as proxies for the primary market betas:

  • Global stocks (VT)
  • US Bonds (BND)
  • Global real estate (REET)
  • Commodities (GCC)
  • Forex (UUP)
  • Cash (SHV)

There are several caveats, starting with limited data. Bitcoin is a relatively young asset class and so this analysis uses a data set that extends only to 2014. In any case, the main result is that trying to “explain” Bitcoin price volatility through this lens is a poor fit, indicated by the low multiple R-squared: a thin 0.0355. In other words, these six factors explain less than 4% of Bitcoin (BTC) returns, this metric suggests.



Not encouraging, but what does resonate is that US bonds (), followed by global stocks…

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