Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/235026
Authors: 
Lambrecht, Marco
Sofianos, Andis
Xu, Yilong
Year of Publication: 
2021
Series/Report no.: 
AWI Discussion Paper Series No. 703
Abstract: 
The massive price bubbles of decentralized cryptocurrencies, such as Bitcoin, have created a puzzle for economists. How can a non-revenue-generating asset exhibit such extreme price dynamics, forming multiple episodes of bubbles and crashes since its creation? The answer is not straightforward, since cryptocurrencies differ in several important aspects from other conventional assets. In this paper, we investigate how key features associated with the Proof-of-Work consensus mechanism affect pricing. In a controlled laboratory experiment, we observe that the formation of price bubbles can be causally attributed to mining. Moreover, bubbles are more pronounced if the mining capacity is centralized to a small group of individuals. Analysis of the order book data reveals that miners seem to play a crucial role in bubble formation. The results demonstrate that high price volatility is an inherent feature of cryptocurrencies based on a mining protocol, which seriously limits any prospects for such assets truly becoming a medium of exchange.
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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