No 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.

In this paper, we gather together the minimum units of Bitcoin identity (the individual addresses), and group them into approximations of business entities, what we call "super clusters". While these clusters can remain largely anonymous, we are able to ascribe many of them to particular business categories by analyzing some of their specific transaction patterns, as observed during the period from 2009-2015. We are then able to extract and create a map of the network of payment relationships among them, and analyze transaction behavior found in each business category. We conclude by identifying three marked regimes that have evolved as the Bitcoin economy has grown and matured: from an early prototype stage; to a second growth stage populated in large part with "sin" enterprise (i.e., gambling, black markets); to a third stage marked by a sharp progression away from "sin" and toward legitimate enterprises.