Cryptocurrency: Speculative Asset and Medium of Exchange
45 Pages Posted: 18 Nov 2021 Last revised: 3 Dec 2021
Date Written: November 17, 2021
Cryptocurrency, characterized by its usage, is both---speculative investment and medium-of-exchange. We combine two models to form an abstraction capable of mirroring this Janus-like quality. Our approach merges an asset-flow approach modeling speculation around an asset's fundamental value into the transactions-form of the quantity equations of money, developed to analyze money as an exchange medium. Our novel approach allows analyzing the inter-temporal interplay of the quantity theory's crucial variables for cryptocurrencies with inflexible token supply in a more meaningful way. The intuitiveness of both component models makes the model simple to understand and applicable in empiric studies and simulations. We demonstrate the richness of the model by running simulations of the adaption process of cryptocurrencies to novel fundamental values and studying price instability. We find that higher fractions of tokens held back by investors lead to disproportionate increases in the instability of price processes in response to shocks. This leads us to the conclusion that sustainable price increases of cryptocurrencies ought to be accompanied by low levels of tokens held back by investors.
Keywords: cryptocurrency, speculation, quantity theory of money, bitcoin
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