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Bursting the bitcoin bubble: Do market prices reflect fundamental bitcoin value?

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  • Podhorsky, Andrea

Abstract

This paper develops a theoretical model of the bitcoin market and demonstrates that the bitcoin’s volatile and explosive price path is a consequence of the Bitcoin protocol’s system of supply management. The model implies that the marginal cost of mining the target supply of bitcoins is the fundamental value of the bitcoin since it corresponds to an equilibrium in the Bitcoin protocol and the rent-seeking tournament among miners. The data provide strong empirical evidence of cointegration between the bitcoin’s price and the marginal cost of mining the target supply of bitcoins, demonstrating the existence of their long-run equilibrium relationship. Current bubble detection techniques indicate that there is no evidence of explosive departures in the price of the bitcoin from its model-implied fundamental value. Since the raw price data exhibit explosive behavior, the apparent bubbles in the price of the bitcoin can be attributed to its nonstationary market fundamentals.

Suggested Citation

  • Podhorsky, Andrea, 2024. "Bursting the bitcoin bubble: Do market prices reflect fundamental bitcoin value?," International Review of Financial Analysis, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:finana:v:93:y:2024:i:c:s1057521924000905
    DOI: 10.1016/j.irfa.2024.103158
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    More about this item

    Keywords

    Bitcoin; Cryptocurrencies; Fintech; GSADF test; Multiple bubbles; Valuation;
    All these keywords.

    JEL classification:

    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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