The Price of a Digital Currency

Abstract

This paper introduces a pricing relation for digital currencies as globally priced assets in competitive markets. Using the pricing relation, the study finds that the U.S. dollar price changes of Bitcoin, unlike other globally traded assets such as commodities and fiat currencies, are slightly negatively correlated with the U.S. dollar price changes of a basket of G10 currencies. It also documents Bitcoin price disparities and discrepancies for various pairs of denominated currencies, namely the U.S. dollar, Euro, British pound, Japanese yen, Canadian dollar, Chinese yuan, and Polish zloty. The Bitcoin price discrepancies are 25% higher than Bitcoin price disparities. Finally, this study examines the theoretical price and volatility of cryptocurrencies with zero fundamental values and finds that they have low price volatility. Consequently, they are much easier to regulate, use, and hold.

Keywords: Bitcoin; Pricing; Global Value; Volatility; Zero Fundamental Value

JEL Classification: F31, E42