Valuation, Liquidity Price, and Stability of Cryptocurrencies
This addresses the stability problem for cryptocurrency investors and policymakers, but it is incremental as it applies existing economic theory to a new domain.
The paper examines cryptocurrencies using asset flow equations and experimental markets, finding that without a tangible value link, prices gravitate toward liquidity value, making stability unlikely in their current form.
Cryptocurrencies are examined through the asset flow equations and experimental asset markets. Since tangible value of a typical cryptocurrency is non-existent, the theory suggests that price will gravitate toward liquidity value, i.e., the total amount of cash available for purchase of the asset divided by the number of units. Thus it is unlikely that cryptocurrencies in their current form will be stable in the absence of a mechanism of a link to value.