Blockchain structure and cryptocurrency prices

Peter Zimmerman

No 855, Bank of England working papers from Bank of England

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 (search for similar items in EconPapers)
JEL-codes: D04 E42 G13 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2020-02-14
New Economics Papers: this item is included in nep-fmk, nep-mac, nep-mon, nep-ore and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0855

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