An Equilibrium Valuation of Bitcoin and Decentralized Network Assets
March 21, 2018
Emiliano S. Pagnotta∗and Andrea Buraschi
Great analysis of Bitcoin especially attempted modeling price impacts of censorship resistance, mining costs, network sizes, reward and incentive structure. Their approach of price equilibrium and the decentralized network economy should be considered in future price models.
“We address the valuation of bitcoins and other blockchain tokens in a new type of production economy: a decentralized financial network (DN). An identifying property of these assets is that contributors to the DN trust (miners) receive units of the same asset used by consumers of DN services. Therefore, the overall production (hashrate) and the bitcoin price are jointly determined. We characterize the demand for bitcoins and the supply of hashrate and show that the equilibrium price is obtained by solving a fixed-point problem and study its determinants. Price-hashrate “spirals” amplify demand and supply shocks…”