The Economics of Bitcoin and Similar Private Digital Currencies

30 Pages Posted: 10 May 2014 Last revised: 25 Feb 2017

See all articles by Gerald P. Dwyer

Gerald P. Dwyer

Clemson University; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Date Written: July 8, 2014

Abstract

Recent innovations have made it feasible to transfer private digital currency without the intervention of an institution. A digital currency must prevent users from spending their balances more than once, which is easier said than done with purely digital currencies. Current digital currencies such as Bitcoin use peer-to-peer networks and open-source software to stop double spending and create finality of transactions. This paper explains how the use of these technologies and limitation of the quantity produced can create an equilibrium in which a digital currency has a positive value. This paper also summarizes the rise of 24/7 trading on computerized markets in Bitcoin in which there are no brokers or other agents, a remarkable innovation in financial markets. I conclude that exchanges of foreign currency may be the obvious way in which use of digital currencies can become widespread and that Bitcoin is likely to limit governments’ revenue from inflation.

Keywords: bitcoin, digital currency, private currency, litecoin, ripple, cryptocurrency, block chain, blockchain

JEL Classification: E4, E41, E42

Suggested Citation

Dwyer, Gerald P., The Economics of Bitcoin and Similar Private Digital Currencies (July 8, 2014). Available at SSRN: https://ssrn.com/abstract=2434628 or http://dx.doi.org/10.2139/ssrn.2434628

Gerald P. Dwyer (Contact Author)

Clemson University ( email )

Department of Economics
Clemson University
Clemson, SC 29634
United States

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

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