A Model of Cryptocurrencies Michael Sockin Wei Xiong NBER Working Paper No. 26816

Issued in March 2020

NBER Program(s):Asset Pricing, Corporate Finance, International Finance and Macroeconomics, Monetary Economics

We model a cryptocurrency as membership in a decentralized digital platform developed to facilitate transactions between users of certain goods or services. The rigidity induced by the cryptocurrency price having to clear membership demand with supply of token by speculators, especially with strong complementarity in membership demand, can lead to market breakdown. While user optimism mitigates the market fragility by increasing user participation, speculator sentiment exacerbates it by crowding users out. Informational frictions attenuate the risk of breakdown by dampening price volatility and platform performance. Furthermore, the users' anticipation of losses from strategic attacks by miners exacerbates the market fragility.

(469 K) Acknowledgments Machine-readable bibliographic record - MARC, RIS, BibTeX Document Object Identifier (DOI): 10.3386/w26816