The topic is value formation of a cryptocurrency meaning how a market price is derived for crypto

QUESTION

Description

Hello. I need a literature review for my economics course. The topic is value formation of a cryptocurrency meaning how a market price is derived for crypto. It is not a paper itself, but a review of different articles so what I need is a comprehensive research. And you shouldn’t include very similar articles, there should be different approaches, different results etc. Also, it shouldn’t be just a summary, articles should be compared and evaluated. 10 sources number is not a must, it is more important to give a good summary+evaluation, but I’d like to have around 10. If you are interested, I can attach my preliminary review and sources I’ve found so that you know the direction and my level&style of writing.

ANSWER

Cryptocurrencies are digital or virtual tokens that use cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature. It is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.

Cryptocurrencies use decentralized control as opposed to centralized digital currency and central banking systems. The decentralized control of each cryptocurrency works through a blockchain, which is a public transaction database, functioning as a distributed ledger. Bitcoin, first released as open-source software in 2009, is generally considered the first decentralized cryptocurrency. Since the release of bitcoin, over 4,000 altcoins (alternative variants of bitcoin, or other cryptocurrencies) have been created.

Value Formation of Cryptocurrencies

The value of a cryptocurrency is derived from a number of factors, including:

• Supply and demand: The supply of a cryptocurrency is limited, as new coins are only created through a process known as mining. This limited supply can lead to increased demand, which can drive up prices.
• Utility: Some cryptocurrencies, such as Bitcoin, can be used to purchase goods and services. This utility can also contribute to the value of a cryptocurrency.
• Speculation: Some investors buy cryptocurrencies in the hope that their prices will increase in the future. This speculation can also drive up prices.

Research on Value Formation of Cryptocurrencies

There has been a growing body of research on the value formation of cryptocurrencies. Some studies have found that the value of cryptocurrencies is driven by supply and demand, while others have found that speculation plays a more important role.

A study by Adam Hayes (2015) found that the value of Bitcoin is largely determined by its cost of production. Hayes found that the price of Bitcoin is closely correlated with the difficulty of mining Bitcoin, which is a measure of how much computing power is required to mine a new Bitcoin.

A study by Nicolas Christin and Ari Juels (2016) found that speculation plays a more important role in the value formation of cryptocurrencies than supply and demand. Christin and Juels found that the price of Bitcoin is more volatile than the price of other assets, such as stocks or gold, and that this volatility is driven by speculation.

Conclusion

The value formation of cryptocurrencies is a complex issue that is not fully understood. However, the research that has been done suggests that supply and demand, utility, and speculation all play a role in determining the value of cryptocurrencies.