The Crypto Multiplier
18 Pages Posted: 19 May 2023 Last revised: 19 Dec 2023
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: Suggested Citation