Bursting the Bitcoin Bubble: Assessing the Fundamental Value and Social Costs of Bitcoin

ADBI Working Paper No. 934

57 Pages Posted: 17 Apr 2019

Multiple version iconThere are 2 versions of this paper

Date Written: March 2019

Abstract

This paper develops a microeconomic model of bitcoin production to analyze the economic effects of the Bitcoin protocol. I view the bitcoin as a tradable commodity that is produced by miners and whose supply is managed by the protocol. I show that bitcoin's volatile price path and inefficiency are related, and that both are a consequence of the protocol's system of supply management. I characterize the fundamental value of a bitcoin and demonstrate that the return on bitcoin appreciates proportionally to the rate of increase in the level of difficulty. In the model, where the price of a bitcoin is based on marginal production costs, successive positive demand shocks result in a rapidly increasing price path that may be mistaken for a bubble. I use the generalized supremum augmented Dickey-Fuller (GSADF) test to demonstrate that the model is able to account for the explosive behavior in the bitcoin price path, providing strong evidence that bitcoin is not a bubble. I also show that the difficulty adjustment mechanism results in social welfare losses from 17 March 2014 to 13 January 2019 of 323.8 million USD, which is about 9.3% of the miners' total electricity costs during this time period.

Keywords: Bitcoin, Cryptocurrencies, Fintech, GSADF Test, Multiple Bubbles, Valuation

JEL Classification: O33, G10, G18

Suggested Citation

Podhorsky, Andrea, Bursting the Bitcoin Bubble: Assessing the Fundamental Value and Social Costs of Bitcoin (March 2019). ADBI Working Paper No. 934, Available at SSRN: https://ssrn.com/abstract=3358270 or http://dx.doi.org/10.2139/ssrn.3358270

Andrea Podhorsky (Contact Author)

York University ( email )

4700 Keele St.
Toronto, Ontario M3J 1P3
Canada

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
167
Abstract Views
941
Rank
239,285
PlumX Metrics