The Role of Utility in Cryptocurrency Valuation: An Analysis of Utility’s Influence on Sustained Price Growth and Stability
Abstract
This thesis examines the role of network utility in driving price growth and stability within the cryptocurrency market. While the cryptocurrency space is often characterized by volatility and speculative trading, this study investigates whether utility, measured through key metrics such as fees, revenue, the number of active users, core developer activity, transaction counts, and total value locked (TVL), serves as a critical driver of sustained price growth and reduced price fluctuations.
To answer this question, a composite utility score is derived using Principal Component Analysis (PCA), with TVL, fees, and revenue emerging as the most significant contributors. Necessary Condition Analysis (NCA) reveals that utility imposes upper thresholds on price growth, with effect sizes of 0.249 and 0.278, underscoring the importance of utility as a necessary condition for sustained price growth. However, utility’s effect on rolling volatility is limited, with effect sizes of 0.084 and 0.092, suggesting that price stability is less dependent on network utility and influenced more by external factors.
The NCA findings are reinforced by multiple regression analyses. For price growth, changes in the utility score remain a significant predictor, even after controlling for market capitalization and market cycles, with a strong positive coefficient (0.2276, p < 0.01). By contrast, utility shows a negligible relationship with price stability, where market capitalization (-0.0024, p < 0.05) and bearish trends (-0.0073, p < 0.05) emerge as stronger stabilizing factors.
An event study of Solana network outages highlights the sensitivity of price dynamics to infrastructure reliability and network utility. Price growth consistently declines post-outage reflecting the negative market response to disruptions in network activity and utility. Volatility responses, however, are mixed, indicating that network outages that amplify uncertainty may or may not dampen speculative activity.
Overall, the study demonstrates that utility is a fundamental driver of sustained price growth but plays a limited role in stabilizing volatility. These findings contribute to the literature on cryptocurrency valuation by emphasizing the importance of network functionality for long-term growth potential. This thesis examines the role of network utility in driving price growth and stability within the cryptocurrency market. While the cryptocurrency space is often characterized by volatility and speculative trading, this study investigates whether utility, measured through key metrics such as fees, revenue, the number of active users, core developer activity, transaction counts, and total value locked (TVL), serves as a critical driver of sustained price growth and reduced price fluctuations.
To answer this question, a composite utility score is derived using Principal Component Analysis (PCA), with TVL, fees, and revenue emerging as the most significant contributors. Necessary Condition Analysis (NCA) reveals that utility imposes upper thresholds on price growth, with effect sizes of 0.249 and 0.278, underscoring the importance of utility as a necessary condition for sustained price growth. However, utility’s effect on rolling volatility is limited, with effect sizes of 0.084 and 0.092, suggesting that price stability is less dependent on network utility and influenced more by external factors.
The NCA findings are reinforced by multiple regression analyses. For price growth, changes in the utility score remain a significant predictor, even after controlling for market capitalization and market cycles, with a strong positive coefficient (0.2276, p < 0.01). By contrast, utility shows a negligible relationship with price stability, where market capitalization (-0.0024, p < 0.05) and bearish trends (-0.0073, p < 0.05) emerge as stronger stabilizing factors.
An event study of Solana network outages highlights the sensitivity of price dynamics to infrastructure reliability and network utility. Price growth consistently declines post-outage reflecting the negative market response to disruptions in network activity and utility. Volatility responses, however, are mixed, indicating that network outages that amplify uncertainty may or may not dampen speculative activity.
Overall, the study demonstrates that utility is a fundamental driver of sustained price growth but plays a limited role in stabilizing volatility. These findings contribute to the literature on cryptocurrency valuation by emphasizing the importance of network functionality for long-term growth potential.