Cover of EconPol Working Paper 48

Equilibrium Bitcoin Pricing

Bruno Biais ( HEC Paris), Christophe Bisière, Matthieu Bouvard, Catherine Casamatta, Albert J. Menkveld (EconPol Europe, Toulouse School of Economics, Universite Toulouse Capitole [TSM-Research])

In this working paper from Bruno Biais ( HEC Paris), Christophe Bisière, Matthieu Bouvard, Catherine Casamatta and Albert J. Menkveld (EconPol Europe, Toulouse School of Economics, Universite Toulouse Capitole [TSM-Research]), the authors offer an equilibrium model of cryptocurrency pricing and confront it to new data on bitcoin transactional benefits and costs. The model emphasises that the fundamental value of the cryptocurrency is the stream of net transactional benefits it will provide, which depend on its future prices. The link between future and present prices implies that returns can exhibit large volatility, unrelated to fundamentals. They construct an index measuring the ease with which bitcoins can be used to purchase goods and services and measure costs incurred by bitcoin owners. Consistent with the model, estimated transactional net benefits explain a statistically signicant fraction of bitcoin returns.

Abstract

We offer an equilibrium model of cryptocurrency pricing and confront it to new data on bitcoin transactional benefits and costs. The model emphasises that the fundamental value of the  cryptocurrency is the stream of net transactional benefits it will provide, which depend on its future prices. The link between future and present prices implies that returns can exhibit large volatility, unrelated to fundamentals. We construct an index measuring the ease with which bitcoins can be used to purchase goods and services, and we also measure costs incurred by bitcoin owners. Consistent with the model, estimated transactional net benefits explain a statistically signicant fraction of bitcoin returns. 

Citation

Bruno Biais, Christophe Bisière, Matthieu Bouvard, Catherine Casamatta, Albert J. Menkveld: "Equilibrium Bitcoin Pricing", EconPol Working Paper 45, July 2020