Blockchain Structure and Cryptocurrency Prices
68 Pages Posted: 11 Nov 2019
Date Written: October 30, 2019
I present a model of cryptocurrency price formation that endogenizes both the financial market for coins and the fee-based market for blockchain space. A cryptocurrency has two distinct features: a price determined by the extent of its usage as money, and a blockchain structure that restricts settlement capacity. Limited settlement space creates competition between users of the currency, so speculative activity can crowd out monetary usage. This crowding-out undermines the ability of a cryptocurrency to act as a medium of payment, lowering its value. Higher speculative demand can reduce prices, contrary to standard economic models. Crowding-out also raises the riskiness of investing in cryptocurrency, explaining high observed price volatility.
Keywords: blockchain, cryptocurrency, global games, price volatility
JEL Classification: D4, E42, G1
Suggested Citation: Suggested Citation