Fundamental Values of Cryptocurrencies and Blockchain Technology

We propose a theoretical model to measure the fundamental values of cryptocurrency and blockchain technology. Due to its secure nature, blockchain allows the transactions to be state-contingent based on highly credible state information. In an economy with adverse selection, traders have an incentive to buy assets with unknown quality by using cryptocurrency to exploit the higher security of blockchain technology. This induces the demand for the cryptocurrency or access to the blockchain platform, determining the fundamental value of these new digital innovations. We also analytically demonstrate the effect of higher security of the blockchain technology: it leads to wider spreads in prices and qualities of assets traded via blockchain protocol and the traditional cash market. As well, it has a non-linear effect on the fundamental values of the cryptocurrency and blockchain platform, depending on the severity of underlying adverse selection. The welfare of agents is also derived, and it is shown to be collinear with the fundamental value of cryptocurrency.