How Value is Created in Tokenized Assets

Abstract

A tidal wave of change is coming to the world of Economic Science. Digital tokens—including bitcoin, altcoins, and cryptocurrencies—will require a fundamental rethinking of valuation, in the same way that the introduction of the stock market required a new understanding of value. As of this writing, the total value of all tokens stands at $500 billion. How do investors place value on computer code, with no central bank or physical asset to support it? Drawing from the literature on behavioral economics and tools from cognitive psychology, we aim to provide the first anchor to understand the criteria that investors are deploying to value new digital assets, making this the first study of applied behavioral economics on token valuation. Using a new instrument called the Framework for Token Confidence, we show how value can be created out of “thin air,” and how tokens, and indeed the entire economic system, operate as something like a “vote of confidence.”