An Equilibrium Valuation of Bitcoin and Decentralized Network Assets

Abstract

We address the valuation of bitcoins and other blockchain tokens in a new type of production economy: a decentralized financial network (DN). An identifying property of these assets is that contributors to the DN trust (miners) receive units of the same asset used by consumers of DN services. Therefore, the overall production (hashrate) and the bitcoin price are jointly determined. We characterize the demand for bitcoins and the supply of hashrate and show that the equilibrium price is obtained by solving a fixed-point problem and study its determinants. Price-hashrate “spirals” amplify demand and supply shocks.

Keywords: Bitcoin, blockchain, cryptocurrencies, crypto assets, mining, decentralization, trust, Ethereum, Litecoin, financial networks, hashrate, miners' competition, unity

JEL Classification: G12, G15, G18