eprintid: 28893
rev_number: 18
eprint_status: archive
userid: 3114
dir: disk0/00/02/88/93
datestamp: 2020-09-28 11:28:47
lastmod: 2020-09-30 12:38:15
status_changed: 2020-09-28 11:28:47
type: workingPaper
metadata_visibility: no_search
creators_name: Lambrecht, Marco
creators_name: Sofianos, Andis
creators_name: Xu, Yilong
title: Does mining fuel bubbles? An experimental study on cryptocurrency markets
subjects: 330
divisions: 181000
keywords: cryptocurrency, financial market experiment
cterms_swd: Bitcoin
cterms_swd: bubbles
abstract: Recent years have seen an emergence of decentralized cryptocurrencies that were initially devised as a payment system, but are increasingly being recognized as investment instruments. The price trajectories of cryptocurrencies have raised questions among economists and policymakers, especially since such markets can have spillover effects on the real economy. We focus on two key properties of cryptocurrencies that may contribute to their pricing. In a controlled lab setting, we test whether pricing is influenced by costly mining, as well as entry barriers to the mining technology. Our mining design resembles the proof-of-work mechanism employed by the vast majority of permissionless cryptocurrencies, such as Bitcoin. In our second condition, half of the traders have access to the mining technology, while the other half can only participate in the market. This is designed to model high concentration in cryptocurrency mining. In the absence of mining, no bubbles or crashes occur. When costly mining is introduced, assets are traded at prices more than 200% higher than fundamental value and the bubble peaks relatively late in the trading periods. When only half of the traders can mine, prices surge much earlier and reach values of almost 400% higher than the fundamental value at the peak of the market. Overall, the proof-of-work mechanism seems to fuel overpricing, which is further intensified by concentration in mining.
date: 2020-09
id_scheme: DOI
id_number: 10.11588/heidok.00028893
schriftenreihe_cluster_id: sr-3
schriftenreihe_order: 0690
ppn_swb: 1734032332
own_urn: urn:nbn:de:bsz:16-heidok-288937
language: eng
bibsort: LAMBRECHTMDOESMINING202009
full_text_status: public
series: Discussion Paper Series / University of Heidelberg, Department of Economics
volume: 0690
place_of_pub: Heidelberg
pages: 46
citation:   Lambrecht, Marco ; Sofianos, Andis ; Xu, Yilong  (2020) Does mining fuel bubbles? An experimental study on cryptocurrency markets.  [Working paper]     
document_url: https://archiv.ub.uni-heidelberg.de/volltextserver/28893/1/Lambrecht_Sofianos_Xu_2020_dp690.pdf