Two economists have developed a model for estimating the price of bitcoin and other assets in decentralized financial networks. This is reported by CoinDesk.
Emiliano Pagnotta and Andrea Buraschi, professors of finance at Imperial College London, presented a theoretical framework for evaluating networks using the Proof-of-Work consensus mechanism, including Bitcoin and Ethereum.
In their model, analysts use two main variables: the number of users representing the demand side, and the hash-rate of the miners representing the supply side.
The authors draw attention to the fact that decentralized financial networks are unique, since the crypto-currencies in them "simultaneously perform two functions". In addition to being an asset, they also encourage the miners to maintain the network. The equilibrium price of a crypto currency is a solution to a "fixed-point problem, characterized by the interaction of consumers and miners."
Researchers write that this problem has 2 solutions under any set of conditions, one of which is $ 0.
Indeed, if the price of bitcoin were zero, miners would not provide any resource to the network, and its trust would be zero. Consumers would derive no utility from the system and would not pay a positive price for bitcoins.
Emiliano Pagnotta and Andrea Buraschi
Professors of finance, Imperial College Business School in London,
But there is a place in this model for a positive equilibrium price. What that figure is depends on the network's hash rate, the expected number of future network users, and the value users place on the network's resistance to censorship, they argue.
According to Pagnotta and Buraschi, a change in regulation in China will have a greater impact on the cost of bitcoin than the same changes, for example, in the UK. Despite the fact that the number of bitcoin users in both countries is approximately the same, there are more miners in China, which means that the restriction of their activities will have a stronger impact on the hashrate and, consequently, the price.
Factor the authors did not take into account is "pure speculative motives," which arguably affected the price of bitcoin more than any other development in 2017.