The Marginal Cost of Mining, Metcalfe's Law and Cryptocurrency Value Formation: Causal Inferences from the Instrumental Variable Approach

29 Pages Posted: 8 Aug 2019

See all articles by Savva Shanaev

Savva Shanaev

Northumbria University; Government of the Russian Federation - Financial University (Moscow Branch)

Satish Sharma

University of Northumbria at Newcastle

Arina Shuraeva

University of London

Binam Ghimire

University of Northumbria at Newcastle

Date Written: June 7, 2019

Abstract

This paper is the first to rigorously test commonly cited simplistic theories of cryptocurrency pricing, namely, cost-based model and Metcalfe’s law, using causal inferences from the instrumental variables approach on block-level data for six proof-of-work coins. Positive effects of hashrate and transaction count implied by cost-based pricing and Metcalfe’s law, respectively, are non-existent for any of the coins investigated. Negative and insignificant estimators cannot be explained by weak instruments, suggesting previously reported strong positive relationships are spurious due to autocorrelation and endogeneity. The study reinforces the need for a more sophisticated cryptocurrency valuation framework.

Keywords: cryptocurrency, blockchain, hashrate, Metcalfe’s law, cost-based pricing, causal inference, instrumental variable

JEL Classification: C22, C26, E42, G12

Suggested Citation

Shanaev, Savva and Sharma, Satish and Shuraeva, Arina and Ghimire, Binam, The Marginal Cost of Mining, Metcalfe's Law and Cryptocurrency Value Formation: Causal Inferences from the Instrumental Variable Approach (June 7, 2019). Available at SSRN: https://ssrn.com/abstract=3432431 or http://dx.doi.org/10.2139/ssrn.3432431

Savva Shanaev (Contact Author)

Northumbria University ( email )

Pandon Building
208, City Campus East-1
Newcastle-Upon-Tyne, Newcastle NE1 8ST
United Kingdom

Government of the Russian Federation - Financial University (Moscow Branch) ( email )

Satish Sharma

University of Northumbria at Newcastle ( email )

Arina Shuraeva

University of London ( email )

Senate House
Malet Street
London, WC1E 7HU
United Kingdom

Binam Ghimire

University of Northumbria at Newcastle ( email )

Pandon Building
208, City Campus East-1
Newcastle-Upon-Tyne, Newcastle NE1 8ST
United Kingdom

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