Cryptocurrency: Speculative Asset and Medium of Exchange

45 Pages Posted: 18 Nov 2021 Last revised: 3 Dec 2021

See all articles by Ingolf Gunnar Anton Pernice

Ingolf Gunnar Anton Pernice

Weizenbaum Institute for the Networked Society

Anna Almosova

Humboldt University of Berlin

Hermann Elendner

Austrian Blockchain Center (ABC Research); UCL Centre for Blockchain Technologies

Date Written: November 17, 2021

Abstract

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

Suggested Citation

Pernice, Ingolf Gunnar Anton and Almosova, Anna and Elendner, Hermann, Cryptocurrency: Speculative Asset and Medium of Exchange (November 17, 2021). Available at SSRN: https://ssrn.com/abstract=3964372 or http://dx.doi.org/10.2139/ssrn.3964372

Ingolf Gunnar Anton Pernice (Contact Author)

Weizenbaum Institute for the Networked Society ( email )

Berlin
Germany

Anna Almosova

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, AK Berlin 10099
Germany

Hermann Elendner

Austrian Blockchain Center (ABC Research) ( email )

Favoritenstra├če 111
Vienna, Vienna 1100
Austria

UCL Centre for Blockchain Technologies ( email )

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