Hi r/Bitcoin. I’m Emiliano Pagnotta, Assistant Professor of Finance at Imperial College Business School. I just published a research paper on the fundamental value and the price of Bitcoin (see link). I’m holding an AMA on the topic here on Mon 16 April at 11am ET


  1. fresheneesz


    Interesting framework, nice work! I think choosing to abbreviate “trustworthiness” as “trust” harms understandability of your paper tho. What you’re calling “trustworthiness”, I’d call “security”. People in the cryptocurrency community especially don’t like systems that require a lot of trust because that almost always significantly degrades security.

    Also, you left out a huge reason why people value Bitcoin: stability of monetary policy and especially it’s eventual non-inflationary monetary policy.

    And I’d recommend that you not use those abbreviations you’re using (CR, DN, DNA) – they really hinder the ability to skim the paper. And even tho i caught the definitions of those things, it makes it much harder to read. Your non technical writeup doesn’t even define DNA so i just thought you meant.. Deoxyribo Nucleic Acid like metaphorically.

  2. igadjeed


    Yet another 40-page tome on the relationship between mining cost and coin price, treating the automatic difficulty adjustment as an afterthought instead of a fundamental feature of Bitcoin

  3. isrly_eder


    Your summary is a little bit unclear on what you think the impact of the reward halving would be. Under a naive EMH model, the halving would be known ahead of time and shouldn’t have a meaningful effect on price (as long as hashrate also responds in a predictable, known, way to the reward decline). Can you clarify what your model has to say about the impact of the halving?

  4. isrly_eder


    Could you elaborate on the relationship between changes in the cost to mine a bitcoin and the trust in the system/pricing? You say:

    > Perhaps counterintuitively, the price decreases with the marginal cost of mining, which is driven by factors such as electricity costs, due to the reduction in the equilibrium network trust (measured in hashrate), thus reducing the bitcoin valuation.

    Does this mean: if mining a bitcoin gets cheaper (i.e if it costs $3000 to mine a bitcoin and an ASIC is released which reduces that to $300), then the effect on price would be negative? Would this be because it is now cheaper to reverse the history of the chain, as equipment is more efficient? And this damages the trust individuals have in the network security?

  5. isrly_eder


    Can you provide some color on what your model stipulates as the “goldilocks zone” for the inflation schedule? I.e. were you able to derive an ideal figure for annualized Bitcoin inflation, striking a balance between security subsidy and the price-depressing impact of inflation?

  6. cryptohazard


    Hi, PhD student on blokchain here. So I have a few questions (I mainly read the tl;dr and skimmed through the paper so I am sure I missed a lot of things):

    * There is this *idea* that cryptocurrencies follow a trilemma between scalability, security(censorship resistance in your work) and decentralisation(i think this is the same as your *trustlessness*). Any idea how scalability, which relates to usability, could be taken into account in your study?
    * By the way, it would be awesome to have mainstream media write about censorship resistance. It is often overlooked.
    * What do you think of incentives that are not financial like how full nodes are not paid to verify or how a miner will continue mining even if it is not profitable for some time? The ideology is the big part of the bitcoin narrative.
    * Are you planning to study different consensus type (like the mention on Ripple)? Anything you want to share on that?
    * How did you decide which model to use for the decentralized network?

  7. hsfl100


    How did you implement the model? (using what software or did you write it from scratch)

    Will you release the model or codebase? I would love to implement it myself and build on it, I want to test the extensions you suggest and I have some ideas of my own.

  8. hsfl100


    Do you think consumers are price-sensitive to changes in hashrate? So far it doesn’t seem like consumers would care about a change in 10 ex/sec up or down, but they might care about a ranking of all cryptocurrencies by hashrate.

  9. thieflar


    I see that “censorship resistance” and “trustlessness” are (validly) considered potential drivers of demand; what are your thoughts on “predictable supply” (i.e. “inflation resistance”) as another example of such a driver? It doesn’t seem to fit cleanly under either other umbrella, in my opinion.

  10. Does the valuation of censorship resistance
    and the effect on the price also include secondary network effects like the possibility of applications that need immutable databases which is only the case e.g. when mining decentralization and hashrate is large enough?

  11. esp-research


    Hi everyone. Andrea and I are so pleased with the interest you’ve shown in the article. We’re going to start answering your questions early! We’re online now, so keep your questions coming.

    Here’s some extra information that might be helpful:

    In the article (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3142022) we propose a valuation model for a class of crypto assets that we label Decentralized Network Assets (DNA). We apply this valuation framework to the Bitcoin protocol.

    An identifying property of these assets is that contributors to the network quality (miners) are compensated in new units of the same token that are enjoyed by consumers of network applications.

    As a result, network quality and the DNA price are jointly determined. We show that the valuation of a DNA such as Bitcoin can be obtained by solving a fixed-point problem.

    Prior to joining Imperial, I was an Assistant Professor at the New York University School of Business. My recent studies have examined the effects of speed and trading fragmentation on asset prices and social welfare; the effect of central clearing reforms on prices and liquidity; the transmission of information in financial markets; and the consequences of new regulations on market quality and performance.

    Joining me on this AMA will be Professor Andrea Buraschi, Chair in Finance at Imperial College Business School: http://www.imperial.ac.uk/people/a.buraschi




    To learn more about me and my research, follow me on Twitter @esp_research. You can also read more of my work:
    From C to D: Bitcoin and the Soviet: https://www.imperial.ac.uk/business-school/knowledge/finance/bitcoin-and-the-soviets/


    UPDATE: Here’s proof that we’re here in person to answer your questions!: https://twitter.com/imperialcollege/status/985890935857909760?s=21


    UPDATE (13:25 ET): Thanks very much everyone for your great questions. We’ve really enjoyed answering them. I’ll be checking back in from time to time, so please do submit any more questions you may have.

    A big thanks to /r/Bitcoin for hosting this AMA!

    And if you’re interested in cryptocurrency research at Imperial, we’re holding a Future of Finance conference on Thursday. You can watch the presentations live on YouTube: https://m.youtube.com/watch?v=aqOAu8Tqlp8&feature=youtu.be

  12. walloon5


    You got my attention in the first sentence:

    “I think the internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing but that will soon be developed, is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B without A knowing B or B knowing A.” Milton Friedman, 1999 1.

    1 Interview conducted by NTUF (1999), https://www.youtube.com/watch?v=6MnQJFEVY7s

    Reading ….

  13. BobAlison


    > Therefore, the overall production (hashrate) and the bitcoin price are jointly determined.

    Interesting topic. Have you posted a high-level review summarizing the key points?

  14. Sotokun3000


    Thanks for this, it is about time (10y almost after the initial white paper ) to have the finance-focused academic community start doing research on cryptocurrencies. So far, academic research mostly resolves around tech/cryptography

  15. MrRGnome


    In this paper you note that modelling the value of DN’s “is not an easy task” and that “We consider some simplifications to keep the analysis tractable.”

    How concerned are you with the impacts simplifying this model has on your conclusions?

    An example: “In the case of DNs, such as Bitcoin, a helpful feature is its digital P2P character: all users and verifiers are connected to each other and thus the topology is near-complete.” Is this a valid assumption when no mechanism in the network topology identifies “users”? It seems that any definition for users should expand beyond full nodes especially when considering valuation.

    Haven’t read the entire paper in depth, but at first glance it looks like it will be worth coming back to.

Leave a Reply

Your email address will not be published.