Bitcoin: Technical Background and Data Analysis

39 Pages Posted: 4 Jan 2015

See all articles by Anton I. Badev

Anton I. Badev

Board of Governors of the Federal Reserve System

Matthew Chen

Board of Governors of the Federal Reserve System

Date Written: October 7, 2014

Abstract

This paper provides the necessary technical background to understand basic Bitcoin operations and documents a set of empirical regularities related to Bitcoin usage. We present the micro-structure of the Bitcoin transaction process and highlight the use of cryptography for the purposes of transaction security and distributed maintenance of a ledger. Using publicly available transaction-level data, we examine patterns of general usage together with usage by Satoshi Dice, the largest online gambling service using Bitcoin as the method of payment. Our analysis suggests that less than 50 percent of all bitcoins in circulation are used in transactions. About half of these transactions involve less than U.S.$100 equivalent, and for the period for which we have data for Satoshi Dice, most of these small-value transactions were related to the online gambling service. Relatively less frequent large value transactions drive the average transaction value to levels above U.S.$40,00 0 equivalent value, and are not likely to involve payments for goods and services. Bitcoin exchange rates exhibit somewhat complicated dynamics. In the past 24 months, the USD-BTC exchange rate increased more than 50-fold. The daily variance of the USD-BTC exchange rate remained remarkably stable for this same period, once the variance calculations account for the changing exchange rate level. We also document that the exchange rates between bitcoin and other major currencies are not well aligned. We interpret this as lack of depth of the exchange markets and as costly exchange rather than as unexploited arbitrage opportunities. Finally, we examine the economic incentives for the participants in the distributed implementation of the Bitcoin scheme.

Keywords: Bitcoin, Payment systems, virtual currency

JEL Classification: E42, L8

Suggested Citation

Badev, Anton I. and Chen, Matthew, Bitcoin: Technical Background and Data Analysis (October 7, 2014). FEDS Working Paper No. 2014-104. Available at SSRN: https://ssrn.com/abstract=2544331 or http://dx.doi.org/10.2139/ssrn.2544331

Anton I. Badev (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Matthew Chen

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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