An Equilibrium Valuation of Bitcoin and Decentralized Network Assets

40 Pages Posted: 20 Mar 2018 Last revised: 22 Nov 2021

See all articles by Emiliano Pagnotta

Emiliano Pagnotta

Singapore Management University

Andrea Buraschi

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Date Written: March 21, 2018

Abstract

We address the valuation of bitcoins and other blockchain tokens in a new type of production economy: a decentralized financial network (DN). An identifying property of these assets is that contributors to the DN trust (miners) receive units of the same asset used by consumers of DN services. Therefore, the overall production (hashrate) and the bitcoin price are jointly determined. We characterize the demand for bitcoins and the supply of hashrate and show that the equilibrium price is obtained by solving a fixed-point problem and study its determinants. Price-hashrate “spirals” amplify demand and supply shocks.

Keywords: Bitcoin, blockchain, cryptocurrencies, crypto assets, mining, decentralization, trust, Ethereum, Litecoin, financial networks, hashrate, miners' competition, unity

JEL Classification: G12, G15, G18

Suggested Citation

Pagnotta, Emiliano and Buraschi, Andrea, An Equilibrium Valuation of Bitcoin and Decentralized Network Assets (March 21, 2018). Available at SSRN: https://ssrn.com/abstract=3142022 or http://dx.doi.org/10.2139/ssrn.3142022

Emiliano Pagnotta (Contact Author)

Singapore Management University ( email )

Li Ka Shing Library
70 Stamford Road
Singapore, 178899
Singapore

HOME PAGE: http://www.emilianopagnotta.com

Andrea Buraschi

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

HOME PAGE: http://www.andreaburaschi.com/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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