Blockchain Structure and Cryptocurrency Prices

68 Pages Posted: 11 Nov 2019

Date Written: October 30, 2019

Abstract

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

Zimmerman, Peter, Blockchain Structure and Cryptocurrency Prices (October 30, 2019). Available at SSRN: https://ssrn.com/abstract=3478498 or http://dx.doi.org/10.2139/ssrn.3478498

Peter Zimmerman (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

HOME PAGE: http://https://sites.google.com/view/peter-zimmerman/

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