Cryptocurrency: Speculative Asset and Medium of Exchange

34 Pages Posted: 18 Nov 2021 Last revised: 30 Mar 2022

See all articles by Ingolf Gunnar Anton Pernice

Ingolf Gunnar Anton Pernice

Weizenbaum Institute for the Networked Society

Anna Almosova

Humboldt University of Berlin

Hermann Elendner

Austrian Blockchain Center (ABC Research); UCL Centre for Blockchain Technologies

Date Written: November 17, 2021

Abstract

Most models derive current cryptocurrency prices over rational expectations of future ones. We complement this perspective with a backward-looking view accounting for herding and momentum trading observed in cryptocurrency markets. Our approach merges an asset-flow approach modeling rational and irrational speculation around an asset’s fundamental value into the transactions-form of the quantity equations of money. Our approach allows us to analyze the inter-temporal relation of the quantity theory’s key variables for cryptocurrencies with their inflexible token supply. Due to the intuitive component models, our model is simple to interpret and to apply empirically and in simulations. We demonstrate its usefulness via simulations of how cryptocurrency prices adjust after changes in fundamental values. We find that a higher fraction of tokens held by investors (rather than circulated by users) leads to disproportionate increases in the instability of the price process in response to shocks. We conclude that stabilization of cryptocurrency prices is unlikely unless accompanied by low levels of tokens held by investors.

Keywords: cryptocurrency, speculation, quantity theory of money, bitcoin

Suggested Citation

Pernice, Ingolf Gunnar Anton and Almosova, Anna and Elendner, Hermann, Cryptocurrency: Speculative Asset and Medium of Exchange (November 17, 2021). Available at SSRN: https://ssrn.com/abstract=3964372 or http://dx.doi.org/10.2139/ssrn.3964372

Ingolf Gunnar Anton Pernice (Contact Author)

Weizenbaum Institute for the Networked Society ( email )

Berlin
Germany

Anna Almosova

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, AK Berlin 10099
Germany

Hermann Elendner

Austrian Blockchain Center (ABC Research) ( email )

Favoritenstraße 111
Vienna, Vienna 1100
Austria

UCL Centre for Blockchain Technologies ( email )

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