Around the world users interested in how crypto-currencies can be classified and evaluated. Two economists from Imperial College London has issued a document focused on two major issues: what type of asset is bitcoin and what is its intrinsic value?
Pagnotta emiliano (Emiliano Pagnotta) and Andrea’s Buraski (Andrea Buraschi), two professors of Economics at the business school of Imperial College London, exploring General equilibrium of the decentralized network economy and the possibility of using analytical solutions for the binding of bitcoin prices to market forces. They offer
the theoretical structure of networks based on proof of work:
«Our document is, to our knowledge, the first example of studying the General equilibrium of the decentralized network of the economy which makes use of analytical solutions that relate the price of bitcoin with market principles. The scope of the equilibrium which we develop, can help solve these issues.»
Economic equilibrium is the state in which the economic forces of supply and demand are balanced. The document of bitcoin is put in this context, focusing on two primary variables: the number of users representing the demand, and Hasrat mining submitting a proposal.
The authors also recognize the unique aspects of decentralized financial networks and study the role of tokens, which act not only as an asset but also an incentive for miners to perform the transaction.
Questions of balance
The equilibrium price of a token is called in the document «problem, which characterizes the interaction between users and miners». Then the paper examines the possibility of two equilibria: one in which the value of bitcoin is zero, and another where the value of its price «is strictly positive». The researchers write:
«If the price of bitcoin was equal to zero, the miners would not network resources, and her confidence would be zero. Consumers would not receive any benefit from the system and would not have to pay a positive price for bitcoins».
In the model examining positive equilibrium price of bitcoin, the price depends on several factors: hash rate of the network, the expected number of future users of the network and «the value that users put into the network from the point of view of resistance to censorship.»
The relationship between miners and price of bitcoin
The pricing model does not take into account the speculative aspect, but assumes the presence of a strong relationship between miners and price of bitcoin. The researchers note that their model can be expanded to include speculators. In addition, one of these restrictions is the method of comparative statics: the extension is to consider multiple time periods.
The document reveals a nonlinear dependence between price and hasraton network. A significant consequence of this relationship is that it can lead to a sharp rise in prices, which helps to explain the large volatility of bitcoin prices.
The strong relationship between miners and price of bitcoin can explain why the restrictive policy in China is correlated with a sharp downturn in the market. Because China is one of the most famous mining pools in the world, the government’s actions against them is likely to have the greatest impact on the bitcoin price than similar prohibitions in other parts of the world.