The massive spread of the
cryptocurrency or digital currency, Bitcoin, opens up new pathways
for researchers to study social action on markets. This reveals
interesting feedback between the exchange rates and mentions in
social media.
Anyone who strolls around the Kreuzberg
district of Berlin, can’t help but notice them – the small signs
on the doors of shops and cafes “Bitcoins accepted”. Customers
pay for their shirt or their cappuccino with their Smartphone instead
of with bank notes or credit cards. The digital currency Bitcoin
makes all this possible. “The image of Bitcoin has changed
fundamentally”, explains David Garcia, a post-doctoral researcher
with the Chair of Systems Design held by Professor Frank Schweitzer.
“Bitcoins used to be the reserve of hackers and computer nerds.
Today, hipsters pay for drinks with them and they are accepted in the
online shops of large companies”. Garcia, together with his
colleagues Claudio Tessone, Pavlin Mavrodiev and Nicolas Perony, has
just published a study on the social dynamics of the Bitcoin economy
in the “Journal of the Royal Society: Interface”.
Internet activity determines exchange
rates
For research the success of the digital
currency (see box) is a stroke of luck as all data on every
transaction carried out in Bitcoin are available in anonymised form
on the Internet. Consequently, Garcia and his colleagues are able to
study the Bitcoin economy using corresponding algorithms. This idea
saw the light of day when they noticed that the 50,000-fold market
value increase in the digital currency in just three and a half years
went hand in hand with a 10,000 percent increase in Google searches
for Bitcoin. The researchers hypothesise that the increase in the
value of Bitcoins is markedly accelerated by activities on the
Internet, in particular the search for information and interaction in
the social media.
To test their hypothesis the
researchers examined four different socio-economic parameters: the
development of the Bitcoin user base, the price developments of the
currency over time, the search for information about Bitcoin on
Google and in Wikipedia (more than six million inquiries) and the
exchange of information about Bitcoin on Twitter (almost seven
million Tweets). In fact, over the past three the researchers
established years major correlations between price developments, the
number of new Bitcoin users, searches on the Internet and Tweets.
At the same time, they discovered two
positive feedback loops which basically reproduced the laws of the
“analogous” economy. The growing popularity of Bitcoins on the
Internet leads to growing demand which, in turn, encourages activity
in the social media. This all results in a higher price for Bitcoins.
The second feedback concerns the user base: the more users become
part of the Bitcoin transaction network, the higher the price because
Bitcoins are not issued in line with demand but in an automated
fashion at regular intervals. This means it is possible to calculate
the available amount at any time. One negative feedback is, however,
surprising. Prior to a major slump in the price of the currency,
there was a dramatic increase in Bitcoin activity on the Internet.
“Big changes in Internet and social media activities lead to
substantial price fluctuations”, comments Nicolas Perony, co-author
of the article.
Understanding markets and social
dynamics
Perony is convinced that the
quantitative analysis of social phenomena on the Internet has major
potential. “With digital currencies we can observe aspects of the
economy that we didn’t have access to with cash. This gives us
greater understanding of how markets actually function.” According
to the authors, the methodology described in the article could be
applied to other areas in society, too. The Bitcoin mining network,
which issues the currency, already harnesses computing power today
which is three hundred times bigger than that of the 500 most
powerful supercomputers together. “The big question is how such a
high-performance system could be used for collaborative activities
which go beyond the production of money”, comments Perony. One
possibility would be, for instance, collaborative research in a
global network or the decentralised ownership of specific goods
managed by a global network. Bitcoms do not belong to anyone. Buyers
merely acquire the right to use a specific amount of them. This study
already outlines today the tools for accurately quantifying and
analysing the social dynamics of collaborative systems of this kind
in the future.
The meteoric rise of Bitcoin
The Bitcoin success story began in 2008
with an article about an alternative, digital currency published
under the pseudonym Satoshi Nakamoto. In July 2010 Bitcoins were
traded for the first time on the Internet exchange Mt. Gox at a rate
of US$ 0.06 for 1 Bitcoin. The total value of all Bitcoins was US$
277,000. By the end of 2013 the market value of all issued Bitcoins
had climbed to more than US$ 14 billion whereby during spikes more
than US$ 1,000 were paid for one Bitcoin. Today, over four million
people use the digital currency. Bitcoins are traded in euros,
dollars and in Chinese renminbi. Unlike conventional currencies there
is no central bank for Bitcoins which has a monopoly for printing
money. New Bitcoins are generated by what is known as mining via a
global computer network – currently at a rate of 25 Bitcoins every
ten minutes. Transactions are likewise verified and carried out on
this network. Even the bankruptcy of important Bitcoin trading
exchanges and negative headlines about money laundering and drug
purchases on the Internet were not able to undermine confidence in
the currency. A few days ago the PC giant Dell announced that it will
henceforth accept Bitcoins as payment for products in its online
shop.
Samuel Schlaefli
Further reading
Garcia D, Tessone CJ, Mavrodiev P,
Perony N. The digital traces of bubbles: feedback cycles between
socio-economic signals in the Bitcoin economy. J. R. Soc. Interface.
2014 11 20140623; doi:10.1098/rsif.2014.0623 (published 6
August 2014)
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