Valuation, Liquidity Price, and Stability of Cryptocurrencies

TL;DR

This paper analyzes the stability of cryptocurrencies using asset flow equations and experiments, highlighting that their prices tend to align with liquidity value due to lack of intrinsic worth, which challenges their stability.

Contribution

It introduces a theoretical framework linking cryptocurrency prices to liquidity and provides experimental insights into their market behavior.

Findings

Cryptocurrency prices gravitate toward liquidity value.

Lack of intrinsic value affects stability.

Market experiments support the theoretical model.

Abstract

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.