Bitcoin price and its marginal cost of production: support for a fundamental value

TL;DR

This paper evaluates a marginal cost of production model for bitcoin, demonstrating its significant role in explaining bitcoin prices and suggesting prices tend to converge to this fundamental value despite bubbles.

Contribution

It provides empirical evidence supporting the marginal cost of production as a fundamental value for bitcoin, challenging claims of its worthlessness.

Findings

Bitcoin prices are strongly linked to marginal production costs.

The 2017 bubble converged with the cost-based valuation in early 2018.

Prices tend to revert to the marginal cost, preventing collapse to zero.

Abstract

This study back-tests a marginal cost of production model proposed to value the digital currency bitcoin. Results from both conventional regression and vector autoregression (VAR) models show that the marginal cost of production plays an important role in explaining bitcoin prices, challenging recent allegations that bitcoins are essentially worthless. Even with markets pricing bitcoin in the thousands of dollars each, the valuation model seems robust. The data show that a price bubble that began in the Fall of 2017 resolved itself in early 2018, converging with the marginal cost model. This suggests that while bubbles may appear in the bitcoin market, prices will tend to this bound and not collapse to zero.