Last week, I was lucky enough to catch my colleague Adam Hayes presenting his new research on cryptocurrencies. Adam has produced three papers from this research, all of which you can download here.
For the uninitiated, cryptocurrencies are a form of electronic payment that operate on an anonymous peer-to-peer network. The 'coins' used in these networks each have a unique numerical code that conforms to an algorithm and exist in a user's digital 'wallet' - a registry of coins for a particular user that is anonymous apart from its own identifying numerical code. Coins are generated endogenously through a decentralized process called 'mining.' Mining involves allocating a portion of digital memory to solving an algorithm generated by the network which are designed to yield a certain quantity of coins at a fairly regular interval.
What Adam shows in his papers is that the value of cryptocurrencies when pegged to Bitcoin - the first and most popular cryptocurrency - generally reflect those currencies' marginal cost of production in terms of electricity generation. Furthermore, Adam insists that cryptocurrencies are no longer money (he allows that they may have been at one point) even though to me they bear a strong resemblance to Marxian commodity money.