Blockchain Structure and Cryptocurrency Prices

71 Pages Posted: 18 Feb 2020

Multiple version iconThere are 2 versions of this paper

Date Written: February 14, 2020

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 distinctive 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: D04, E42, G13

Suggested Citation

Zimmerman, Peter, Blockchain Structure and Cryptocurrency Prices (February 14, 2020). Bank of England Working Paper No. 855, Available at SSRN: https://ssrn.com/abstract=3538334 or http://dx.doi.org/10.2139/ssrn.3538334

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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