On the Value of Virtual Currencies

Bank of Canada Working Paper No. 2016-42

40 Pages Posted: 22 Apr 2016 Last revised: 1 Sep 2016

See all articles by Wilko Bolt

Wilko Bolt

De Nederlandsche Bank (Dutch Central Bank); VU University Amsterdam

Maarten R.C. van Oordt

VU University Amsterdam; Tinbergen Institute

Multiple version iconThere are 2 versions of this paper

Date Written: April 20, 2016

Abstract

This paper develops an economic framework to analyze the exchange rate of virtual currency. Three components are important. First, the actual use of virtual currency to make payments. Second, the decision of forward-looking investors to buy virtual currency (thereby effectively regulating its supply). Third, the elements that jointly drive future consumer adoption and merchant acceptance of virtual currency. The model predicts that, as virtual currency becomes more established, the exchange rate becomes less sensitive to the impact of shocks to speculators' beliefs. This undermines the notion that excessive exchange rate volatility will prohibit widespread usage of virtual currency.

Keywords: Virtual currencies, exchange rates, payment systems, speculation, bitcoin, blockchain, cryptocurrencies

JEL Classification: E42, E51, F31, G1

Suggested Citation

Bolt, Wilko and van Oordt, Maarten R.C., On the Value of Virtual Currencies (April 20, 2016). Bank of Canada Working Paper No. 2016-42, Available at SSRN: https://ssrn.com/abstract=2767609 or http://dx.doi.org/10.2139/ssrn.2767609

Wilko Bolt

De Nederlandsche Bank (Dutch Central Bank) ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Maarten R.C. Van Oordt (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute ( email )

Amsterdam, 3062 PA
Netherlands

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