On the Value of Virtual Currencies

41 Pages Posted: 24 Sep 2016  

Wilko Bolt

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

Maarten R.C. van Oordt

Government of Canada - Bank of Canada

Multiple version iconThere are 2 versions of this paper

Date Written: September 23, 2016

Abstract

This paper develops an economic framework to analyze the exchange rate of virtual currency. Three components are important. First, the current 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 will become less sensitive to the impact of shocks to speculators’ beliefs. This undermines the notion that excessive exchange rate volatility will prohibit widespread use of virtual currency.

Keywords: virtual currencies, exchange rates, payment systems, speculation, bitcoin

JEL Classification: E42, E51, F31, G1

Suggested Citation

Bolt, Wilko and van Oordt, Maarten R.C., On the Value of Virtual Currencies (September 23, 2016). De Nederlandsche Bank Working Paper No. 521. Available at SSRN: https://ssrn.com/abstract=2842557 or http://dx.doi.org/10.2139/ssrn.2842557

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)

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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