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A Model of Cryptocurrencies

Author

Listed:
  • Michael Sockin

    (McCombs School of Business, University of Texas at Austin, Austin, Texas 78712)

  • Wei Xiong

    (Bendheim Center for Finance, Princeton University, Princeton, New Jersey 08544; School of Management and Economics, Chinese University of Hong Kong, Shenzhen, Guangdong 518172, China)

Abstract

We model cryptocurrencies as utility tokens used by a decentralized digital platform to facilitate transactions between users of certain goods or services. The network effect governing user participation, in conjunction with the nonneutrality of the token price, can cause the token market to break down. We show that token retradeability mitigates this risk of breakdown on younger platforms by harnessing user optimism but worsens this fragility when sentiment trading by speculators crowds out users. Elastic token issuance mitigates this fragility, but strategic attacks by miners exacerbate it because users’ anticipation of future losses depresses the token’s resale value.

Suggested Citation

  • Michael Sockin & Wei Xiong, 2023. "A Model of Cryptocurrencies," Management Science, INFORMS, vol. 69(11), pages 6684-6707, November.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:11:p:6684-6707
    DOI: 10.1287/mnsc.2023.4756
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    Cited by:

    1. Assamoi, Vincent K. & Ekponon, Adelphe & Guo, Zihan, 2025. "Are cryptocurrencies priced in the cross-section? A portfolio approach," Finance Research Letters, Elsevier, vol. 71(C).
    2. Aslanidis, Nektarios & Bariviera, Aurelio & Kapetanios, George & Sarafidis, Vasilis, 2025. "Heterogeneous Exposures to Systematic and Idiosyncratic Risk across Crypto Assets: A Divide-and-Conquer Approach," MPRA Paper 125124, University Library of Munich, Germany.
    3. Rzayev, Khaladdin & Sakkas, Athanasios & Urquhart, Andrew, 2025. "An adoption model of cryptocurrencies," European Journal of Operational Research, Elsevier, vol. 323(1), pages 253-266.
    4. Rachana Harish, Arjun & Liu, Xinlai & Li, Ming & Zhong, Ray Y. & Huang, George Q., 2025. "The new supply chain information sharing Renaissance through crypto valuation mechanism of digital assets," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 195(C).
    5. Bui, Mai & Pham, Huy & Nguyen Thanh, Binh & Tiwari, Aviral Kumar, 2024. "Revisiting the determinants of cryptocurrency excess return: Does scarcity matter?," International Review of Economics & Finance, Elsevier, vol. 96(PC).
    6. Shu, Mingyu & Liu, Baoliu & ouyang, Wenpei & Sun, Rengui & Lin, Yaoyang, 2025. "Multi-scale dynamic correlation and information spillover effects between climate risks and digital cryptocurrencies: Based on wavelet analysis and time-frequency domain QVAR," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 663(C).

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