A Model of Cryptocurrencies
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.
We thank An Yan for a comment that led to this paper, and Will Cong, Haoxiang Zhu, Aleh Tsyvinski, and seminar participants at ITAM, NBER Asset Pricing Meeting, NBER Summer Institute, Tsinghua, UBC, UNC, and Yale for helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.