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Abstract
The massive price bubbles of decentralized cryptocurrencies, such as Bitcoin, have created a puzzle for economists. How can a non-revenue-generating asset exhibit such extreme price dynamics, forming multiple episodes of bubbles and crashes since its creation? The answer is not straightforward, since cryptocurrencies differ in several important aspects from other conventional assets. In this paper, we investigate how key features associated with the Proof-of-Work consensus mechanism affect pricing. In a controlled laboratory experiment, we observe that the formation of price bubbles can be causally attributed to mining. Moreover, bubbles are more pronounced if the mining capacity is centralized to a small group of individuals. Analysis of the order book data reveals that miners seem to play a crucial role in bubble formation. The results demonstrate that high price volatility is an inherent feature of cryptocurrencies based on a mining protocol, which seriously limits any prospects for such assets truly becoming a medium of exchange.
Document type: | Working paper |
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Series Name: | Discussion Paper Series / University of Heidelberg, Department of Economics |
Volume: | 0703 |
Place of Publication: | Heidelberg |
Edition: | 1. Überarbeitung |
Date Deposited: | 09 Jun 2021 13:48 |
Date: | May 2021 |
Number of Pages: | 58 |
Faculties / Institutes: | The Faculty of Economics and Social Studies > Alfred-Weber-Institut for Economics |
DDC-classification: | 330 Economics |
Controlled Keywords: | Bitcoin |
Uncontrolled Keywords: | bubbles, cryptocurrency, financial market experiment |
Series: | Discussion Paper Series / University of Heidelberg, Department of Economics |
Available Versions of this Item
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Does mining fuel bubbles? An experimental study on cryptocurrency markets. (deposited 28 Sep 2020 11:28)
- Does mining fuel bubbles? An experimental study on cryptocurrency markets. (deposited 09 Jun 2021 13:48) [Currently Displayed]