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On Bubbles in Cryptocurrency Prices

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  • Maarten R.C. van Oordt

    (Vrije Universiteit Amsterdam)

Abstract

This paper investigates how cryptocurrencies relate to concepts such as bubbles, Ponzi-schemes and digital gold in a tractable model for cryptocurrency prices. Investors in the baseline equilibrium hold coins to sell them at a profit to future users if they anticipate in increase in transactional demand per coin. Investors in a bubble equilibrium hold the cryptocurrency because they expect its price to appreciate merely due to future investment inflows. Investors who participate in a bubble equilibrium for a cryptocurrency with non-negative money growth experience Ponzi-scheme equivalent payoffs in the aggregate. The net investment inflows required to sustain a bubble equilibrium are smaller for cryptocurrencies with less new issuance, a lower level of transactional demand and higher growth in transactional demand. Cryptocurrencies with negative issuance (e.g., that burn transaction fees) may generate positive aggregate cash flows to investors even if their price path follows a bubble trajectory.

Suggested Citation

  • Maarten R.C. van Oordt, 2024. "On Bubbles in Cryptocurrency Prices," Tinbergen Institute Discussion Papers 24-050/IV, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20240050
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    References listed on IDEAS

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    More about this item

    Keywords

    Asset pricing; Bitcoin; crypto-asset; exchange rates; rational bubble;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G1 - Financial Economics - - General Financial Markets

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