Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/235013 
Year of Publication: 
2020
Series/Report no.: 
Discussion Paper Series No. 690
Publisher: 
University of Heidelberg, Department of Economics, Heidelberg
Abstract: 
Recent years have seen an emergence of decentralized cryptocurrencies that were initially devised as a payment system, but are increasingly being recognized as investment instruments.The price trajectories of cryptocurrencies have raised questions among economists and policy-makers, especially since such markets can have spillover effects on the real economy. We focus on two key properties of cryptocurrencies that may contribute to their pricing. In a controlledlab setting, we test whether pricing is influenced by costly mining, as well as entry barriers tothe mining technology. Our mining design resembles the proof-of-work mechanism employed by the vast majority of permissionless cryptocurrencies, such as Bitcoin. In our second condition, half of the traders have access to the mining technology, while the other half can only participate in the market. This is designed to model high concentration in cryptocurrency mining. In theabsence of mining, no bubbles or crashes occur. When costly mining is introduced, assets aretraded at prices more than 200% higher than fundamental value and the bubble peaks relativelylate in the trading periods. When only half of the traders can mine, prices surge much earlierand reach values of almost 400% higher than the fundamental value at the peak of the market. Overall, the proof-of-work mechanism seems to fuel overpricing, which is further intensified byconcentration in mining.
Subjects: 
Bitcoin
Bubbles
Cryptocurrency
Financial Market Experiment
JEL: 
C90
D53
G12
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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