We offer a general equilibrium analysis of cryptocurrency pricing. The fundamental value of the cryptocurrency is its stream of net transactional benefits, which depend on its future prices. This implies that, in addition to fundamentals, equilibrium prices reflect sunspots.

This, in turn, implies there are multiple equilibria and extrinsic volatility, that is, cryptocurrency prices fluctuate even when fundamentals are constant. To match our model to the data, we construct indices measuring the net transactional benefits of bitcoin. In our calibration, a fraction of the variations in bitcoin returns reflects changes in net transactional benefits, but a larger fraction reflects extrinsic volatility.

Full paper link:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3261063

Albert’s website

https://albertjmenkveld.com/