Metcalfe’s Law as a Model for Bitcoin’s Value
23 Pages Posted: 2 Dec 2017 Last revised: 21 Dec 2017
Date Written: October 9, 2017
This paper demonstrates that bitcoin’s medium- to long-term price follows Metcalfe’s law. Bitcoin is modeled as a token digital currency, a medium of exchange with no intrinsic value that is transacted within a defined electronic network. Per Metcalfe’s law, the value of a network is a function of the number of pairs transactions possible, and is proportional to n-squared. A Gompertz curve is used to model the inflationary effects associated with the creation of new bitcoin. The result is a parsimonious model of supply (number of bitcoins) and demand (number of bitcoin wallets), with the conclusion bitcoin’s price fits Metcalfe’s law exceptionally well. Metcalfe’s law is used to investigate Gandal’s et.al  assertion of price manipulation in the Bitcoin ecosystem during 2013-2014.
Keywords: Bitcoin, Metcalfe, Finance, Investment, Economics, Network Economics, Currency
Cryptocurrencies as an Asset Class: An Empirical Assessment
59 Pages Posted: 30 Nov 2017 Last revised: 6 Dec 2017
Date Written: December 5, 2017
It has long been debated whether cryptocurrencies are just a passing fad, a disruptive innovation, or simply share features with standard securities. In this paper, I use a novel data set of prices, traded volumes, and market capitalization for a large set of cryptocurrencies to empirically investigate both their relationship with standard asset classes and the main driving factors behind market activity. The main empirical results suggest that there is a significant relationship between returns on cryptocurrencies and commodities such as gold and energy. Also, while volatility correlates with traded volume, the latter is primarily driven by past returns and by a short-lived effect of aggregate market uncertainty. This is consistent with existing theoretical models in which trading activity is primarily driven by investors’ sentiment. Finally, impulse-response functions from a panel Vector Autoregressive (VAR) model show that macroeconomic factors do not significantly drive trading activity in cryptocurrency markets.
To its proponents, the cryptocurrency Bitcoin offers the potential to disrupt payment systems and traditional currencies. It has also been subject to security breaches and wild price fluctuations. This paper identifies and analyzes the impact of suspicious trading activity on the Mt. Gox Bitcoin currency exchange, in which approximately 600,000 bitcoins (BTC) valued at $188 million were fraudulently acquired. During both periods, the USD-BTC exchange rate rose by an average of four percent on days when suspicious trades took place, compared to a slight decline on days without suspicious activity. Based on rigorous analysis with extensive robustness checks, the paper demonstrates that the suspicious trading activity likely caused the unprecedented spike in the USD-BTC exchange rate in late 2013, when the rate jumped from around $150 to more than $1,000 in two months.KeywordsBitcoincryptocurrenciesfraudexchange rate manipulationJEL classification
Bank of America Corp. may not be willing to help customers invest in Bitcoin, but that doesn’t mean it isn’t plowing into the technology underlying the cryptocurrency.The Charlotte, North Carolina-based lender has applied for or received at least 43 patents for blockchain, the ledger technology used for verifying and recording transactions that’s at the heart of virtual currencies. It is the largest number among major banks and technology companies, according to a study by EnvisionIP, a New York-based law firm that specializes in analyses of intellectual property.“Based on what’s publicly out there, the technology sector hasn’t embraced blockchain as much as the financial-services industry,” Maulin Shah, managing attorney for EnvisionIP, said in an interview.International Business Machines Corp., which has targeted blockchain and artificial intelligence for future growth, tied with Mastercard Inc. for second on the list, with 27 each.
The Blockchain for Creative Industries cluster comprises staff from the Faculty of Arts and Creative Industries, as well as from Science and Technology. We explore the disruptive, and enabling potential of blockchain technology for music, photography, art, fashion, film, journalism and gaming. As well as high-quality research outputs, the cluster is committed to teaching at both undergraduate and postgraduate levels.
Areas of interest include new business and economic models; creative entrepreneurship and artistic identity; copyright; visual analytics; and digital forensics. As well as exploring the considerable potential for innovation, we also look at barriers to adoption and possible disadvantages of this new technology – one some have suggested could be as significant as the World Wide Web.
Members of the cluster have been interviewed on behalf of the French Intellectual Property Office, and have taken part in round-table events alongside representatives of the Department of Work & Pensions and the Government Office for Science.
Cluster members have spoken at events organised by Blockchain Storm and the Bitcoin and Blockchain Leadership Forum, and at festivals including the Great Escape and Wilderness. We have also spoken internationally, at events including Distributed: Music in Nashville, USA, and as part of Global Entrepreneurship Week in Bergen, Norway. Cluster members have been interviewed on the BBC and written articles for publications including the Guardian, the Conversation and Distributed magazine.
Our Music on the Blockchain report, published in 2016, received extensive media coverage from publications including Music Week, Music 4.5, International Business Times, Tech City News, Cryptocoin News, City A.M., Fortune magazine, Huffington Post and Record of the Day. The report was launched at Sonos Studios in London, with leading figures in academia and industry.
The cluster is part of the Open Music Initiative, alongside Berklee, MIT, Harvard and UCL.
- Blockchain for Creative Industries Cluster (2016), Music on the Blockchain: Blockchain For Creative Industries Research Cluster, Middlesex University
- O’Dair, M (2016). The networked record industry: How blockchain technology could transform the consumption and monetisation of recorded music. New Economic Models in the Digital Economy, March 2016.
White Rabbit begins with the assumption that while they love their pirate sites, a many as 60% of pirates would happily reward creators if it was made easy enough. The startup deals with this by inviting pirates to carry on using the kinds of unauthorized sites and services they’re using already, but with a twist.By installing the White Rabbit browser plug-in, the company will be able to see what content the user is accessing. It will then attempt to match that download to deals it’s made with the companies behind those movies or TV shows. They’ll then get paid a set amount.“White Rabbit is a content ecosystem accessed through a plugin that recognizes the film and series you stream. The streaming sites are P2P or open server, meaning users can choose where they want to stream,” White Rabbit CEO Alan R. Milligan informs TF.“We already have a library of films that have won and been nominated for Oscars, Cannes, Berlin and Venice film festival best film prizes – but will continue adding more films and series as we near launch.”
I talked to the Dutch business daily Het Financieele Dagblad about blockchain applications in the music business. (In Dutch)
Crypto-Securities Regulation: ICOs, Token Sales and Cryptocurrencies under EU Financial Law
44 Pages Posted: 30 Nov 2017 Last revised: 13 Dec 2017
Date Written: November 22, 2017
Cryptocurrencies, such as bitcoin and ethereum, have not only risen to public attention as novel means of payments. Rather, the current hype is fueled by financial applications built on top of these currencies that stand to potentially upend consumer and investment markets. The most remarkable and economically relevant of these applications are tokens sold via initial coin offerings (ICOs, also called token sales). In 2017 alone, the equivalent of more than $ 3 billion have been raised through ICOs. In these entirely online-mediated offerings, startup entrepreneurs sell tokens registered on a blockchain in exchange for cryptocoins traded on that blockchain (typically bitcoins or ethers). Investors receive tokens that can be understood as cryptographically-secured coupons which embody a bundle of rights and obligations.
In July 2017, the SEC released an investigative report that highlighted that such tokens can be subject to the full scope of US securities regulation. As a result, issuers increasingly structure ICOs such as to prevent US citizens and residents from obtaining tokens in order to exclude the reach of US securities regulation. However, for the time being, EU citizens and residents are free to invest in tokens. This raises the question to what extent EU securities regulation is applicable to ICOs and, particularly, whether issuers have to publish and register a prospectus in order to avoid criminal and civil prospectus liability in the EU. In conceptual terms, this depends on whether tokens are considered “securities” under the EU prospectus regulation regime. The question is of great practical relevance since, despite the high stakes involving more than $100 million in some ICOs, to our knowledge, up to now not a single token issuer has published or registered any such prospectus.
Against this background, this paper develops a nuanced approach that distinguishes between three archetypes of tokens: currency, investment, and utility tokens. It analyzes the differential implications of each of these types, and their hybrid forms, for EU securities regulation. While the variety of tokens offered necessitates a case-by-case analysis, the discussion reveals that at least some types and hybrid forms of tokens are subject to EU securities regulation. By and large, pure investment tokens typically must be considered securities, while pure currency and utility tokens are exempted from securities regulation in the EU. In identifying these archetypes, regulation and market oversight will have to put substance over form. Finally, we spell out criteria for the application of EU securities regulation to hybrid token types.
The paper closes by offering two policy proposals to mitigate legal uncertainty concerning token sales. First, we suggest tailoring disclosure requirements to the code-driven nature of token sales. Such an ICO-specific safe harbor would offer a clear and less burdensome path to EU law compliance for token sellers who suspect that their tokens may qualify as securities. This only requires the Commission to amend its delegated 2004 Commission Prospectus Regulation. Second, we propose that, on an international level, governments form a compact to bestow certainty about the application of their respective securities regulation regimes to token sales. This is, first, to avoid regulatory overkill on the one and regulatory lacunae on the other hand in online-mediated, global token sales. Second, overlapping, and partially contradicting, securities regulation regimes can nullify each other. In the end, only a joint international regulatory regime can efficiently balance investor protection and investor access in the face of the novel generation of decentralized blockchain applications.
Keywords: blockchain, ICO, token sale, initial coin offering, bitcoin, ethereum, prospectus, EU law, smart contracts, DAO, utility token, investment token, safe harbor, cryptocurrencies