Cryptocurrencies and Cagan's Model of Hyperinflation

21 Pages Posted: 6 Mar 2018 Last revised: 24 Jun 2021

See all articles by Urban J. Jermann

Urban J. Jermann

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Date Written: March 7, 2018

Abstract

The drivers of the prices of Bitcoin and Ethereum are studied within a framework based on Cagan's model of hyperinflation. In the model, the prices of the cryptocurrencies are driven by stochastic adoption and velocity shocks as well as endogenous expectations of future prices. The model is estimated with data for prices, transaction volumes, and money supplies. A majority of price fluctuations in both currencies can be attributed to shocks in adoption, velocity shocks are much less important. The money demand sensitivity to expected price changes is estimated to be larger for Bitcoin than for Ethereum, and both have higher sensitivity than fiat currencies during episodes of hyperinflation.

Keywords: Bitcoin, Ethereum, money demand, exchange rates

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JEL Classification: E31, E41, F31, G12

Suggested Citation

Jermann, Urban J., Cryptocurrencies and Cagan's Model of Hyperinflation (March 7, 2018). Available at SSRN: https://ssrn.com/abstract=3132050 or http://dx.doi.org/10.2139/ssrn.3132050

Urban J. Jermann (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-4184 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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