The Crypto Multiplier

18 Pages Posted: 19 May 2023 Last revised: 19 Dec 2023

See all articles by Rodney Garratt

Rodney Garratt

University of California, Santa Barbara (UCSB)

Maarten R.C. van Oordt

VU University Amsterdam; Tinbergen Institute

Date Written: May 15, 2023

Abstract

This paper develops the concept of a “crypto multiplier,” which measures the equilibrium response of a cryptocurrency’s market capitalization to aggregate inflows and outflows of investors’ funds. The crypto multiplier takes high values when a large share of a cryptocurrency’s coins is held as an investment rather than being used as a means of payment. Empirical evidence shows that the number of coins held for the purpose of making payments is rather small for major cryptocurrencies suggesting large crypto multipliers. The analysis explains why announcements by large investors, celebrity endorsements or financial crises can result in surprisingly large price movements. Our results highlight the need for market participants to be vigilant when accepting block holdings of a cryptocurrency as collateral or as compensation for seed funding. The crypto multiplier predicts the liquidation value may be substantially below the prevailing market value.

Keywords: Bitcoin, Cryptocurrency, Exchange Rates, Monetary Economics, Risk Management

JEL Classification: E42, E51

Suggested Citation

Garratt, Rodney and van Oordt, Maarten R.C., The Crypto Multiplier (May 15, 2023). Available at SSRN: https://ssrn.com/abstract=4448467 or http://dx.doi.org/10.2139/ssrn.4448467

Rodney Garratt

University of California, Santa Barbara (UCSB) ( email )

South Hall 5504

Maarten R.C. Van Oordt (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute ( email )

Amsterdam, 3062 PA
Netherlands

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