Virtual Money Illusion and the Fundamental Value of Non-Fiat Anonymous Digital Payment Methods: Coining a (Bit of) Theory to Describe the Bitcoin Phenomenon
5 Pages Posted: 21 Aug 2014
Date Written: March 15, 2014
This paper investigates a simple question: What are the determinants of a Non-Fiat Anonymous Digital Payment Method’s (N-FAD) value? The investigation illuminates a unique characteristic of money that is not widely discussed in the economic literature, which distinguishes commonly accepted methods of payment from N-FAD’s. Highlighting the difference between money and N-FAD’s lays a foundation for exposing previously unmentioned valuation concepts to N-FAD’s that provide a theoretical upper bound to the equilibrium price of N-FAD’s and a description of the determinants affecting the rate of stochastic convergence toward equilibrium. In particular, the paper finds that the characteristics of a Bitcoin-type N-FAD algorithm inefficient and entail avoidable risks to the payment methods value.
Keywords: Bitcoin, Fiat Currency, Digital Payments, Deflation, Inflation, Equation of Exchange
JEL Classification: E4, E41, E51
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