How the price of bitcoin affects gambling and exchange transactions

Abstract

The Bitcoin Protocol incentivizes computation power in a distributed network in order to create a reliable grantor-grantee ledger tracking ownership of Bitcoin on cryptographic wallet addresses, known as the Bitcoin blockchain. The Bitcoin blockchain creates a permanent record of transactions between wallet addresses. Wallet ownership does not typically change (the owner is the one who holds the cryptographic keys to use the Bitcoin in the wallet). Thus, once a wallet address is classified (i.e. a gambling service or an exchange), all transactions involving that wallet address can be studied and analyzed using the wallet’s classification. For this thesis, I classified 43,621,232 wallet addresses by combining four publicly-available databases containing Bitcoin wallet classifications. Using these classifications, I iteratively went through each of the 3.3 Billion transactions on the Bitcoin blockchain between blocks 0 (January 3, 2009) and 500,000 (December 12, 2017), and classified 1.07 Billion transactions (32.22%). I then aggregated the daily totals for each classification and calculated the averages in both volumes of Bitcoin and value in U.S. Dollars for each classification. Finally, I calculated the correlations between gambling and exchange transactions (including the number of transactions, the total volume in Bitcoin, the total value in U.S. Dollars the average transactions sizes in both Bitcoin and U.S. Dollars) and the price of Bitcoin in U.S. Dollars (including the closing price, and the change in price and percentage from one day prior, seven days prior, and thirty days prior). With this data, I attempt to determine the answers to three questions: 1. To what extent does the changing price of Bitcoin, in U.S. Dollars, affect the number and size of gambling transactions? 2. To what extent does the changing price of Bitcoin, in U.S. Dollars, affect the number and size of transactions sent to and from exchanges? 3. What was Bitcoin primarily used for before January 2018, and to what extent were those uses ethically questionable? I find that, until a large price spike occurred for Bitcoin starting around November 30, 2016, people tended to wager fairly constant amounts in Bitcoin rather than constant amounts of their local fiat currency (i.e. U.S. Dollars). Starting around November 30, 2016, the wagers became more closely tied to U.S. Dollars with diminishing amounts being wagered in Bitcoin as the price of Bitcoin increased. I also find the opposite to be true for exchange transactions: people tended overall to buy and sell differing amounts of Bitcoin to reflect fairly constant values in U.S. Dollars during several different time periods, albeit with the average selling transaction in U.S. Dollars slowly increasing over time as the price of Bitcoin rose over the years. Additionally, I find that people appeared to care more about the absolute value change of their investments and to care less about the percentage change of their speculative investments over time, as shown in exchange buying and selling transactions. In other words, if Bitcoin’s price in U.S. Dollars went from $100.00 to $120.00, people would buy and sell fewer times and in smaller amounts than if Bitcoin went from $1,000.00 to $1,200.00, even though the percentages were the same. This shows that people tend to view the price changes of their speculative investments in absolute terms rather than in percentages. Furthermore, I find that during a period of time when Bitcoin was dropping, gamblers increased the number of times they gambled, possibly in an attempt to offset their speculative investment losses. In contrast, exchange buying did not seem to be correlated with the price during this time period, and people tended to continue to buy Bitcoin in the same constant amounts of U.S. Dollars. Finally, I find that during the first 4 years of Bitcoin, it was heavily used for gambling and ethically questionable purposes, and that its use shifted significantly towards being treated primarily as a speculative asset at least through January 2018, but with significant continued ethically questionable uses.