Economists Explore Bitcoin's 'Equilibrium Price' in New Paper

Two economists have developed a model for pricing bitcoin and other assets in decentralized financial networks.

Emiliano Pagnotta and Andrea Buraschi, professors of finance at Imperial College Business School in London, have proposed a theoretical structure for networks based on proof of work, which include bitcoin and ethereum.

The authors point out that decentralized financial networks are unique in that tokens "Simultaneously serve two functions." In addition to functioning as an asset, they incentivize miners to maintain the network.

The equilibrium price of the token is the solution to "a fixed-point problem that characterizes the interaction between consumers and miners," according to the paper.

"Indeed, if the price of bitcoin were zero, miners would not provide any resource to the network, and its trust would be zero. Consumers would derive no utility from the system and would not pay a positive price for bitcoins."

There is also a positive equilibrium price, according to this model.

What that figure is depends on the network's hash rate, the expected number of future network users, and the value users place on the network's resistance to censorship, they argue.

This framework sheds light on some recent adjustments in bitcoin's price.

Even though both countries have similar numbers of bitcoin users, China has more miners - meaning a crackdown there would have a greater effect on the hashrate and the price.

One factor the authors did not take into account is "Pure speculative motives," which arguably affected the price of bitcoin more than any other development in 2017.