Bursting the bitcoin bubble: Do market prices reflect fundamental bitcoin value?

This paper develops a theoretical model of the bitcoin market and demonstrates that the bitcoin’s volatile and explosive price path is a consequence of the Bitcoin protocol’s system of supply management. The model implies that the marginal cost of mining the target supply of bitcoins is the fundamen...

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Bibliographic Details
Published in:International review of financial analysis 2024-05, Vol.93, p.103158, Article 103158
Main Author: Podhorsky, Andrea
Format: Article
Language:English
Subjects:
Bitcoin
Cryptocurrencies
Fintech
GSADF test
Multiple bubbles
Valuation
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Summary:This paper develops a theoretical model of the bitcoin market and demonstrates that the bitcoin’s volatile and explosive price path is a consequence of the Bitcoin protocol’s system of supply management. The model implies that the marginal cost of mining the target supply of bitcoins is the fundamental value of the bitcoin since it corresponds to an equilibrium in the Bitcoin protocol and the rent-seeking tournament among miners. The data provide strong empirical evidence of cointegration between the bitcoin’s price and the marginal cost of mining the target supply of bitcoins, demonstrating the existence of their long-run equilibrium relationship. Current bubble detection techniques indicate that there is no evidence of explosive departures in the price of the bitcoin from its model-implied fundamental value. Since the raw price data exhibit explosive behavior, the apparent bubbles in the price of the bitcoin can be attributed to its nonstationary market fundamentals. •The bitcoin’s price dynamics result from the protocol’s interference in the market.•The Bitcoin protocol works against the self-correcting mechanism of the market.•Adjustments of the difficulty result in volatile and explosive behavior in the price.•There is cointegration between the bitcoin’s price and the marginal cost of mining.•Apparent bubbles in the price can be attributed to nonstationary market fundamentals.
ISSN:1057-5219
1873-8079
DOI:10.1016/j.irfa.2024.103158