The Market for Hashes: Economics of cryptocurrencies

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Presentation transcript:

The Market for Hashes: Economics of cryptocurrencies Sarthak Gaurav, SJMSOM, IIT B December 17, 2017 IIT Bombay

Cryptocurrency Market Structure Oligopoly - Few players with similar but differentiated products - Entry barriers Asset class of Cryptocurrencies - Store of value Medium of exchange Unit of account Deferring payments

Supply Side Why “mine” in an inelastic supply? incentives of participants Redefining work: algorithms such as PoW returns to computational effort welfare loss of different consensus protocols given the mining costs

Demand Side Too high demand chasing a scarce but useful asset Investment in computational power and ancillary markets Price discovery process: frequent cycles - Transaction demand or Speculative demand?

Historical price of bitcoin Source: https://www.buybitcoinworldwide.com/kb/investing-in-bitcoin/

Price Volatility or Mania? Irrational exuberance - extraordinary popular delusions and madness of crowds (Mackay 1841) Source: http://www.thebubblebubble.com/tulip-mania/

Low cross-cryptocurrency price correlations Source: https://www.kaggle.com/dbarkhorn/crypto-correlation

Transaction costs in 2017 Source: Lee (2017)

An ode to Hayek The Denationalization of Money (1974) - Govt. monopoly over money is dangerous - Private sector can print its own currency …but Issues: Hoarding, Network (transaction frequency and costs), Stability Power (computing) dynamics, REGULATION

Way forward General equilibrium model that incorporates technology features Optimal design and efficiency of systems