The Routes to Chaos in the Bitcoins Market
14 Pages Posted: 17 Feb 2014 Last revised: 26 Feb 2014
Date Written: February 17, 2014
The Bitcoins market is an example of a complex system without a stable equilibrium. The users of Bitcoins fall into two broad categories: 1) Capital gain seekers: who have no functional use for the currency apart from an expectation of capital gains. 2) Functional users: who use the currency to save on transaction costs as it provides a less costly medium of exchange over traditional fiat currencies. I assume that each category consists of mean-variance optimizers, and specify evolutionary dynamics for each category. I identify two routes to Chaos in the Bitcoins market. If only capital gain seekers are present, then one route to Chaos is via the logistic map. If both categories of users matter then a possible route to Chaos is via the delay logistic-Henon map. A policy recommendation follows: in order to pre-empt Chaos in the Bitcoins market, currency exchanges should be allowed to convert Bitcoins into dollars and vice versa if and only if there is an associated transaction involving buying and selling of goods or services or if the Bitcoins are freshly mined. Such a regulation pre-empts Chaos by reducing the impact of capital gain seekers on the virtual currency’s value.
Keywords: Bitcoins, Chaos, Speculation, Digital Currency, Complex System, Mean-Variance Optimization, Medium of Exchange, Store of Value, Logistic Map, Delay Logistic-Henon Map
JEL Classification: G12, G13
Suggested Citation: Suggested Citation