The Time Value of a Digital Currency: Bitcoin Interest Rates Dynamics

Abstract

This paper uses simple monetary economic theory in order to extract implied BTC interest rates from exchange rates, interest rates and monetary supply data. Uncovered interest rate parity permits to derive a theoretical risk free BTC interest rate that is supposed to apply in a no arbitrage environment with rational expectations. Application to BTC/US$ exchange rates, Libor and Money supply US M2 data on the period September 2010 to January 2014 provides estimates, which illustrate what a risk free BTC interest rate could look like.

Keywords: bitcoin, digital currency, interest rates, exchange rates, money supply, risk premium

JEL Classification: E43, F47, G14