2019 International Conference on Networking and Network Applications (NaNA)
Research on pricing mechanism and security of digital currency
Xiaohan Zhu Xiang Lu
Beijing Information Science & Institute of Information
Technology University, BISTU Engineering, CAS
China, Beijing School of Cyber Security,
zxh970110@outlook.com University of Chinese Academy of
Sciences
China, Beijing
luxiang@iie.ac.cn
Abstract—With the rapid development of block chain
technology and its application, digital currency, which does not
rely on national credit endorsements, is emerging. The financial
technological innovation is becoming another strong driving
forces for promoting social and economic developments. Unlike
the price formation mechanism of traditional fiat currency, the
price formation mechanism for digital currency is still unclear.
Because financial regulators cannot accurately predict the price
trend of digital currency, there is a corresponding lack of means
to intervene in the price of digital currency in time of crisis. The
lack of such technology also provides a way for security
attackers with ulterior motives to attack the monetary system
by manipulating the prices of digital currency. This paper will
take Bitcoin as an example to study the price formation
mechanism of digital currency, therefore clarifying the factors
affecting the price of digital currency, and provide the means of
price supervision, prediction and intervention for financial
regulators to ensure the development of digital currency.
Keywords- Digital Currency Price; Bitcoin; Econometrics; Vector
Autoregressive Model1
I. INTRODUCTION
Digital currency [1] is a kind of currency provided in
digital form. It exhibits properties similar to physical currency,
but allows for instant transactions and borderless ownership
transfers.
The price of bitcoin has risen from zero when it was
created in 2009 to around $1,100 at the end of 2013. By the
end of 2014, the price had dropped to about $250, but since
then it has risen again, reaching as high as $19,000 in 2018,
before falling further to $3,000. Such huge price swings are
not common in traditional currency, suggesting that there
must be other determinants of price formation that is unique
to digital currency. Such a huge price fluctuations have a huge
risk for most investors, at the same time, also thanks to the
lure of the face in the "rich", and many in the formation of
behind the price a little knowledge of the people is very easy
to make wrong judgment, so as to give yourself a huge loss, at
the same time, this situation also gives many malicious
investors the opportunity to use the underlying factors behind
This paper is supported by the National Key R&D Program of
China (2017YFB1400700), corresponding author: Xiang Lu,
luxiang@iie.ac.cn
978-1-7281-2629-6/19/$31.00 ©2019 IEEE 325
DOI 10.1109/NaNA.2019.00063
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Shaobo Wu
Beijing Information Science &
Technology University, BISTU
China, Beijing
wushaobo@bistu.edu.cn
the price to intervene in the currency price movements, so as
to control digital currency prices.
At present, there are more than 1,500 kinds of digital
currency in the world. The daily market value is about RMB
2.5 trillion, and the daily trading volume exceeds RMB 200
billion. The number of global digital currency traders has
exceeded 30 million. With so many people active in the digital
money market, it is important to study the security of digital
money.
In this paper, we focus on the price formulation scheme
behind the digital currency on the perspective of macro
economy. Our objective is to find unique and significant
characteristics of the digital currency to affect its price. The
potential price influence factors include, for example,
speculative risk, credit risk, exchange rate, as well as the
generation mechanism and means of profit, and so on. We
want to find what factors are controlling the price behind, and
how we can predict the price changes.
II. DIGITAL CURRENCY PRICING FACTOR ANALYSIS
A. Bitcoin
Bitcoin is a cryptocurrency, a digital currency. It is a
decentralized digital currency that has no central bank or
single administrator and can be sent from user to user on a
peer-to-peer bitcoin network without the need for middlemen.
Transactions are verified by network nodes through
cryptography and recorded in a common distributed ledger
called blockchain. Bitcoin was released in 2009 as open-
source software and was created as a reward for a process
known as mining, in which computer network participants,
who provide computing power, verify and record payments
into a public ledger called the blockchain. In return for the
service, they receive transaction fees and newly minted
bitcoin. The main difference between bitcoin and a standard
legal tender, such as the dollar or the euro, is that the number
of units in circulation is not controlled by individuals, groups,
companies, central authorities or governments, but by
software algorithms. A fixed number of bitcoins are issued at
a constant priority definition and a known rate, and according
to this rate, the stock of bitcoins increases at a decreasing rate.
When the maximum number of bitcoins in circulation reaches
21 million units, the growth rate of bitcoins will converge to
zero, and the growth rate will not change after 2140 years.
Bitcoin can be used to buy goods or services around the world,
as long as trading partners accept bitcoin as a means of
payment. A transaction means the owner of a bitcoin transfers
ownership of a certain amount of bitcoin in exchange for other
currencies, goods, and services. More and more companies are
accepting bitcoin as payment for their goods and services,
with more than 100,000 places around the world accepting
bitcoin transactions in early 2019.
B. Analysis of influencing factors of bitcoin price
Since the popularization of digital currency, a large
number of scholars have done a lot of research on its price
fluctuation. Taking bitcoin as an example, this paper draws the
conclusion through data and other papers that the price
formation of a commodity is often related to multiple factors,
and the related policy impact in the financial market and the
global macro-financial development have a complex impact
on the price formation of commodities [2]. 1. through analysis,
Kristoufek [3] points out that conventional economic factors,
such as trade demand, supply and price level, have an
important impact on the long-term development of bitcoin,
and the attitudes and policy plans of governments directly
determine its fate; Buchholz [4] found that, as the price of any
also a kind of digital currency in essence. 2. The main basic
technology of digital currency is blockchain technology.
Bitcoin is based on blockchain technology. 3. Functionally
speaking, digital currency and Bitcoin have the functions of
the value scale, circulation means, storage means and payment
means, which are basically consistent with legal currency. 4.
As far as the scope of use is concerned, both digital currency
and bitcoin are in circulation all over the world and are
recognized by many countries and can be used for trading.
In addition to the above reasons, from the unit price
distribution of digital currency, according to statistics, only 3%
of the price of digital currency is between 1,000 yuan and
10,000 yuan, indicating that most of the prices of digital
currency are lower, and only a few, such as bitcoin and ether
coin, are higher. Therefore, it is particularly representative and
meaningful to study price formation factors by replacing
digital currency with bitcoin.
III. BITCOIN PRICE-ORIENTED PREDICTION MODEL
For the gold standard model [8], the total money supply of
gold coins is equal to the inventory of gold coins in circulation
and the exchange rate of gold. Therefore, take Bitcoin as an
example, assuming that B represents the total inventory of
Bitcoin in circulation, represents the exchange rate of
Bitcoin (i.e. N dollars per unit of bitcoin), and then
represents the total money supply of Bitcoin , i.e.
currency, an important determinant of the price of bitcoin is  =  
the interaction between bitcoin supply and demand. 2. the The demand for US dollar-denominated Bitcoin circulation
research results of Bouoiyour [5] and Selmi [5] also support is assumed to depend on the general price level P of goods
that bitcoin is largely out of line with macroeconomic and services. It can be determined indirectly by the global
fundamentals and presents as a "speculative bubble". macroeconomic index of the real market. The economic scale
According to estimates by Bouoiyour and Selmi, the G of Bitcoin and the velocity V of Bitcoin circulation can give
contribution of speculation (measured by investors' the total demand for Bitcoin circulation, that is, the
attractiveness to bitcoin) to the formation of bitcoin prices demand for Bitcoin circulation.
dominates other drivers, such as market forces of supply and
demand; 3. van Wijk [6] stressed that global macro-financial
development in the role of setting the price of the currency,
global macro-financial development such as prices, exchange
rates and measures through the stock exchange index to reflect,
van Wijk, found that there is evidence that, for example, the
Dow Jones index, the euro against the dollar, and oil price has
a significant influence on the value of the currency for a long
 =  
Bitcoin velocity V, which measures the frequency of a unit of
Bitcoin used to buy goods and services, depends on the
opportunity cost of holding it (inflation, opportunity interest
rate).
When the balance between Bitcoin supply and Bitcoin
demand implies the following equilibrium price relationship:
time. 4. the above factors are considered the only currency
price fluctuation in the price under the global macroeconomic
factors, ignoring the blockchain based COINS under the
influence of the nature itself, therefore this study directly
using blockchain information to predict the formation of the
currency price, such as the block rate of hash chain (hash),
difference and block formation rate and so on.
C. The Reasons for Choosing Bitcoin to Study the Pricing
Mechanism of Digital Money
This paper uses Bitcoin as the representative to study the
pricing mechanism of digital currency. The reason is not only
that Bitcoin is the most popular digital currency, but also the
following reasons: 1. Digital currency is a kind of legal
currency existing and circulating form, which exists in a
digital way. Bitcoin is a kind of digital currency in the form of
P2P [7], which can be used as the function of money and is
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 = 
In a perfect market, the equilibrium price is given by the above
equation, which means that the price of Bitcoin in US dollars
is directly proportional to the general price level of goods or
services multiplied by the economic scale of Bitcoin, and
inversely proportional to the circulation speed of Bitcoin
multiplied by the total stock in Bitcoin market.
A. Expansion of Digital Money Price Model
1. According to the analysis of [4] [5], one of the key
drivers of Bitcoin price is the interaction between supply and
demand in the Bitcoin market. The demand for Bitcoin is
mainly driven by its value as a medium of exchange for goods
and services, i.e. its value in future exchange. The empirical
estimable model of Bitcoin price supply and demand can be
obtained by combining the gold standard expansion model.
Among them, represents the general price level of goods
and services, represents the economic scale of Bitcoin, development and current situation, or related policies, can
represents the velocity of Bitcoin circulation, and a total promote or inhibit the role.
inventory of Bitcoin in circulation, that is: 4. After considering the global macroeconomic factors, we
 = + + + +
for an error term, from the derivation of the extended gold
standard model, it is expected that the coefficients and
in the empirical model are positive and and are negative.
2. Bitcoin prices may be affected by the risks and
uncertainties of the entire Bitcoin system. It establishes
market share by building trust and credibility among market
participants, and expectations of trust and acceptance are
particularly important. Since Bitcoin transactions are
conducted only through the Internet, network security is a
major challenge, and the decisions of potential investors and
users may be affected by increased or reduced media attention.
Information is particularly important when there are many
+   also need to consider the impact of Bitcoin's own
characteristics on its price. For example, as we all know, the
"reserved quantity" of Bitcoin is limited to 21 million. With
the passage of time, Bitcoin's "mining" speed becomes slower
and harder, and "miners" get fewer and fewer profits while
"mining". That is to say, the rising cost of "mining" may have
a negative impact on the price of Bitcoin to some extent.
Therefore, it is necessary to study and analyze the influence
of the nature of Bitcoin itself on the basis of blockchain.
Therefore, the process of Bitcoin price is described directly by
using block chain information. The technical characteristics of
Bitcoin itself influence . Bitcoin price model is:
= + + + + + + +
alternative investment opportunities, active search costs, and
security issues. Potential investors may prefer the investment
opportunities that the news media pay special attention to.
Generally speaking, increased demand for Bitcoin due to
higher attractiveness may have an upward trend over the price
of Bitcoin, while lower attractiveness may mean a decline in
demand for Bitcoin and its price. This adds an investment
attraction factor to the Bitcoin price model, that is:
+  
B. Digital Money Price Prediction Model Based on Vector
Autoregression
Vector autoregression (VAR) is a stochastic process
model used to capture the linear correlation between multiple
time series. All variables in VAR enter the model in the same
way: each variable has an equation to explain its evolution
 = + + + + + +  according to its own lag value, the lag value of other model
For this empirical estimable model, the expected coefficient variables and an error term.
can be positive or negative, because the attractiveness of A VAR model with two variables , lagging 1 period
investment can be promoted or inhibited in the process of is taken as an example.
price forecasting at different times, according to different , = + , , + , , +
policies and related news and other influential factors.   
, = + , , + , , +
3.[6] It illustrates the role of global macroeconomic and Among them, , ~ (0, ) , Cov( , )=0
financial development, which affects the price of Bitcoin Written in matrix form is:
through variables such as stock exchange index, exchange rate, , , ,
and oil price measurement. The impact of macroeconomic and  = + +  
, , ,
financial indicators on the price of Bitcoin may play a role
through a variety of channels. For example, stock exchange , ,
indices may reflect the overall macroeconomic and financial = , = , = , =
, ,
development of the global economy. Favorable VAR model with two variables , lagging 1 period
macroeconomic and financial developments may stimulate written in matrix form is:
the use of Bitcoin in trade and exchanges, thereby increasing  = + +  
its demand, which may have a positive impact on Bitcoin It can be inferred that the VAR model with N variables
prices; inflation and price indices are another type of indicator
lagging P period is expressed as follows:
reflecting important macroeconomic and financial
 = + + + …+ + ,
developments. Oil prices are one of the main sources of
~ ( , ) 
demand and cost pressures, providing early signs of inflation.
Therefore, when the oil price signals a potential change in the Among them,
ȟ
general price level, this may lead to a devaluation (or = , , … , , , = ( , , … , )Ą
, ,
appreciation) of the Bitcoin price. The exchange rate may also , ⋯ ,
reflect the development of inflation, which has a positive = ⋮ ⋱ ⋮ , = 1,2, … ,
impact on the price of Bitcoin. This adds macroeconomic and ⋯
, ,
financial development factors t to the Bitcoin price model,
=( , ,…, )Ą
namely:
 = + + + + + + + Each equation of the VAR model can be regarded as a
  separate equation, and the commonly used least square
For this empirical estimable model, the expectation method can be used to estimate each equation one by one.
coefficient can be positive or negative, because the role of
macroeconomic and financial development in the price
forecasting process, according to the global economic

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C. Application of Bitcoin Price Estimation Model in Vector
Autoregression Model
For the empirical estimable model of Bitcoin price = (MWTRV), the above data are extracted from [9].
+ + + + + + + +
the representative factors are found for the above seven
variables, and a database is established to select the
appropriate type of lag period-the number of days. After data
processing of the database, the stationarity of the equation is
tested, and the adaptive database is established. Data are
substituted into the vector autoregressive equation formula
= + + + …+ + the
coefficient of variables is estimated by the least square method,
and the relationship between the factors affecting the price of
Bitcoin and the prediction model is obtained. The relevant
models of Bitcoin price prediction are screened out, and the
results of the model are analyzed according to the relevant test
indicators.
IV. NUMERICAL SIMULATION AND VERIFICATION
ANALYSIS OF DIGITAL CURRENCY PRICE FORECASTING
MODEL
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A. Data analysis and database construction
1. For the market forces of the supply-demand
relationship of digital money, total Bitcoins (TOTBC) are
used to calculate the total inventory B of circulating Bitcoins;
the total number of Bitcoin Numbers of Transactions
(NTRAN) and the number of Bitcoin addresses used each day
are used. N Number of Unique Bitcoin Addresses Used
(NADDU) instead of Bitcoin Economic Scale G; Bitcoin
Median Transaction Confirmation Time (ATRCT) instead of
Bitcoin Currency Velocity V; all the above data are extracted
from [9]. In order to measure the general price level P of
goods and services in the global economy, the USDEUR
(exchange rate between the US dollar and the euro) extracted
from [10] is used, because in the data, the price of Bitcoin is
denominated in US dollars. For example, if the dollar
appreciates against the euro, it is also likely to appreciate
against Bitcoin. Conversely, the rise in the Euro-dollar
exchange rate will reduce the number of dollars a Bitcoin
needs to pay, thereby reducing the price of Bitcoin.
2. For digital currency attractiveness A, according to [3],
search frequency related to digital currency is a good
indicator of potential investors' interest in money. However,
a variable Baidu Encyclopedia view may measure investors'
and users' interest in Bitcoin because it captures the
information needs of Bitcoin and extracts data from [11].
Getting information from Bitcoin Wallet represents people's
investment in Bitcoin to show how attractive digital money
is to people, including the number of registered users of
Bitcoin My Wallet of Users (MWNUS), the number of daily
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transactions of Bitcoin My Wallet Number. Transaction Per
Day, MWNTD, Bitcoin My Wallet Transaction Volume
3. In order to capture the impact of macro-financial
development on the Bitcoin price M, following van Wijk [6],
we use the oil price (OPEC Crude Oil Price, OBR) and the
Dow Jones Composite Index (DJCI), which is an industry
average. These two variables are often used in the literature
to explain global macro-economic and financial development.
Oil prices are extracted from [12], and the Dow Jones Index
is extracted from Eastern Wealth Network [13]. Global
macro-economy can also be indirectly reflected by gold price
(GOLDP) and Nikkei 225 Stock Price (N225). Gold price is
extracted from [14] and the Nikkei index is extracted from
[13].
4. In order to consider the influence of the nature of
Bitcoin on C, we choose Bitcoin Hash Rate (HRATE),
Bitcoin Difficulty (DIFF), Bitcoin Average Block Size
(AVBLS), and Bitcoin Average Block Size (Bitcoin Average
Block Size), and Bitcoin Hash Rate (HRATE) of blockchain.
Coin Miners Revenue, MIREV, the number of transactions
per block in the blockchain (NTRBL), the above data are
extracted from [9].
In statistics, the logarithm is usually first used to process
time series. The reason why logarithm post-processing is that
logarithm function is a monotone incremental function in its
definition domain, and logarithm does not change the relative
relationship of data. Its main functions are as follows: 1. Time
series need to do the unit root test of stationarity, logarithm
can generally make the sequence stable, that is, it will not
change the data. The properties and correlations of the
variables, however, compress the scale of the variables. 2. It
can make the residual of the model present random
characteristics, rather than trend or intercept. 3. It is easy to
eliminate heteroscedasticity by taking logarithmic data. 4. It
has economic significance, such as growth rate, change rate,
and elasticity. So the data turns to LNMKPRU, LNTOTBC,
LNNTRAN, LNNADDU, LNATRCT, LNNTRBL,
LNMWNUS, LNMWNTD, LNMWTRV, LNHRATE,
LNDIFF, LNMIREV, LNAVBLS, LNTOUTV, LNTRVOU,
LNN225, LNDJCI, LNORB, LNUSDEUR, LNGOLDP,
LNSREBD.
B. VAR model analysis
Heading 1
For the model = + + + + +
+ + + , nine explanatory variables were
used: LNMKPRU, LNTOTBC, LNNTRAN, LNNADDU,
LNNTRBL, LNMWNTD, LNHRATE, LNDIFF, LNSRE,
LNSRE, after screening (Unit root test, Cointegration test).
Heading 2
Granger causality test is based on the stable VAR model.
It is not to test the logical causality, but to test the sequence of
variables. Whether the prior information of one variable
affects the current information of another variable. Granger
pointed out that from the perspective of prediction, if one
variable X is not helpful in predicting another variable Y, then
X is not the cause of Y; on the contrary, if X is the cause of Y,
two conditions must be satisfied: first, X should be helpful in
predicting Y, that is, in the regression of Y's past value, adding
X's past value as an independent variable should significantly
increase the explanatory power of regression; Y should not be
helpful in predicting X. The reason is that if X is helpful in
predicting Y and Y is helpful in predicting X, there may be
one or more other variables, which are both the cause of X
change and the cause of Y change.
From TABLE 1 ˈ it is concluded that LNSREABD,
LNDIFF, and LNNTRBL are helpful to LNMKPRU forecast,
while other variables have no obvious influence on Bit
currency price forecast.
TABLE I. VAR GRANGER CAUSALITY TEST
response function observes the response of each variable in
the model to the impact over time; and the variance
decomposition is to further evaluate the contribution of each
endogenous variable to the prediction difference, for example,
for the Bitcoin price prediction model. In a given lag period,
the impulse fluctuation of investment attraction a_t of
independent variable has influence on the dynamic changes of
current and future value of dependent variable Bitcoin price
P_t^B over time, i.e. the percentage of influence in a given lag
period, which is the proportion of standard deviation of
predicted residual affected by the impact of different new
interest rates. That is the contribution ratio of endogenous
variables to the standard deviation. LNMKPRU.

Granger causality test

Null Hypothesis F-Statistic Prob.
LNTOTBC does not Granger Cause
0.78502 0.5998
LNMKPRU
LNSREBD does not Granger Cause
2.06436 0.0441
LNMKPRU
LNDIFF does not Granger Cause
2.62168 0.0106
LNMKPRU
LNHRATE does not Granger Cause
0.66223 0.7043
LNMKPRU
LNMWNTD does not Granger Cause
0.69621 0.6754
LNMKPRU
LNNTRAN does not Granger Cause
1.06779 0.3815
LNMKPRU
LNNADUU does not Granger Cause
1.58731 0.1343 Figure 1. independent variables on pulse impact of LNMKPRU
LNMKPRU
LNNTRBL does not Granger Cause From Figure 2, the results of variance decomposition
2.39743 0.0191
LNMKPRU show that most of the standard deviations of the Bitcoin
Heading 3 Market Price (INMKPRU) are carried by itself from 100% in
The impulse response function describes the response of the first phase to 93.8%, and continue to play a major role until
an endogenous variable to residual shock. Specifically, it the 30th phase, while other factors play a relatively small role.
describes the impact (dynamic impact) on the current and This shows that the impact of the market price of Bitcoin on
future values of endogenous variables after a standard its own innovation has a great impact on its prediction error,
deviation impact (from inside or outside of the system) on the which means, the price of the Bitcoin market itself can predict
random error term. This analysis method is called the impulse its next trend of change.
Variance decomposit ion
response function. For example, for the Bitcoin price Period LNMKPRU LNT OT BC LNNT RAN LNNADUU LNNT RBL LNMWNT D LNHRAT E LNDIFF LNSREBD
         
forecasting model, in a given lag period, the impulse of 









(









standard deviation of the investment attractiveness of 



















independent variables over time has a dynamic impact on the 



















current and future values of the dependent variable Bitcoin 



















price . All variables considered can be incorporated into a 



















system to reflect the interaction of all variables in the system 



















and give the results of the interaction of all information in the 



















system. It can not only give the time lag interval of policy 



















effect, but also give the degree and direction of the impact, 



















and the results are accurate. Like Figure 1, to explore the 



















influence of independent variables on the pulse impact of 



















Heading 4 



















The application of the VAR model can also use the 




















variance decomposition method to study the dynamic 





















characteristics of the model. The impulse response function          

describes the impact of each endogenous variable in the VAR Figure 2. Variance decomposition
model on itself and other endogenous variables, or the impulse

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Heading 5
As shown in Figure 3, the short-term forecast time is from
December 1, 2018, to March 1, 2019, in which the green curve
represents the true value of the price of Bitcoin and the blue
curve represents the static forecast curve of the price of
Bitcoin. Static prediction is based on the actual value of the
lag term in the VAR model. From the static forecasting effect,
the effect is ideal, the forecast value slightly deviates from the
actual value, but always around the actual value fluctuation,
the forecast value is prior to the actual value fluctuation and
the trend is similar, showing good forecasting effect. From the
forecasting results, the price forecast curve in the short term
in the future has an upward trend, indicating that the short-
term Bitcoin price will rise in the future.
Figure 3. Static prediction
As shown in Figure 4, the short-term forecast time is from
January 1, 2019, to April 1, 2019. One month after the date
of the data, the green curve represents the true value of the
price of Bitcoin, and the blue curve represents the future price
forecast curve of the price of Bitcoin. Dynamic prediction is
based on the fitting value of the lag term in the VAR model.
From the dynamic forecast effect, the forecast value shows
that the price of Bitcoin is rising, which coincides with the
static forecast trend. At the same time, according to the actual
price of Bitcoin, the price does rise, which shows that the
forecast effect is more effective.
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Figure 4. Dynamic prediction
V. CONCLUSION
In this paper, the influence and prediction of Bitcoin price
and other 20 price factors are analyzed in the multiple
regression model and the vector autoregression model
respectively. The unique index of Bitcoin per day and the total
number of transactions per day have a strong correlation with
the price of Bitcoin.
The results of simulation and empirical analysis show that:
the total daily transactions of Bitcoin wallets, the total number
of unique addresses used every day and the increase of hash
rate have certain effects on the decline of Bitcoin prices; the
total number of Bitcoin transactions per day, the number of
transactions per block in the blockchain, the amount of Bitcoin
search, hash rate have certain effects on the rise of Bitcoin
prices; the effect on Bitcoin price is not significant. According
to impulse response analysis, for the above influential and
human intervention factors, such as the total number of
transactions per day, a short period of time to exert an impact
on the price of Bitcoin will produce different degrees of
positive and negative fluctuations, in order to intervene in the
market price of Bitcoin, price manipulation. At the same time,
special protection should be given to these factors in order to
prevent people from making improper measures to mobilize
the price of the Bitcoin market. For example, many Bitcoin
transactions in a short period of time may cause the price of
Bitcoin to rise. Some people will follow the trend blindly, and
then the behind-the-scenes Mafia will stimulate the price to
fall by means of response. It has a negative impact on the
trading market.
For the future work of this paper, the selection of data
needs to be refined, and more factors should be taken into
account.
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