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Title: Cryptocurrencies: Intrinsic value, bubbles and heavy-tailedness Authors:  Rustam Ibragimov - Imperial College London and St. Petersburg State University (United Kingdom) [presenting]
Christine Parlour - UC Berkeley Haas School of Business (United States)
Johan Walden - UC Berkeley, Haas School of Business (United States)
Abstract: A parsimonious model is developed for the price of a virtual currency. In the model, the virtual currency's price depends on the surplus it generates by decreasing frictions of trade, its exposure to sudden negative shocks, e.g., in the form of regulation, and potentially the presence of rational bubbles. Price and trading volume dynamics of the virtual currency differ in several important ways from those of stocks and other asset classes. Importantly, the model implies heavy-tailed power law distributions for the virtual currency's price in the case when it contains a bubble component, and semi-heavy-tailed log-normal distributional tails when the price is based on intrinsic value. In empirical tests, the recent market dynamics of Bitcoin and other cryptocurrencies are well explained by our model.