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

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.

KEYWORDS:

• Bitcoin
• cost of production
• valuation model
• bubbles
• cryptocurrency
• model testing

JEL CLASSIFICATION:

• D40
• E47
• G12
• C52

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ For consistency, Bitcoin with a capital ‘B’ refers to the general system, network and protocol, while Bitcoin with a small ‘b’ refers to the digital currency itself or units thereof.

² https://www.bloomberg.com/news/articles/2017–09-12/jpmorgan-s-ceo-says-he-d-fire-traders-who-bet-on-fraud-bitcoin.

³ https://www.wsj.com/articles/bitcoins-wild-ride-shows-the-truth-it-is-probably-worth-zero-1,505,760,623.

⁴ Or at least, an expected lower bound to its market price.

⁵ https://en.wikipedia.org/wiki/Electricity_pricing.

⁶ Testing for autocorrelation suggests that two is the appropriate number of lags.