Some Simple Bitcoin Economics

46 Pages Posted: 5 Apr 2018

See all articles by Linda Schilling

Linda Schilling

Ecole Polytechnique- CREST

Harald Uhlig

University of Chicago - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 2018

Abstract

How do Bitcoin prices evolve? What are the consequences for monetary policy? We answer these questions in a novel, yet simple endowment economy. There are two types of money, both useful for transactions: Bitcoins and Dollars. A central bank keeps the real value of Dollars constant, while Bitcoin production is decentralized via proof-of-work. We obtain a "fundamental condition", which is a version of the exchange-rate indeterminacy result in Kareken-Wallace (1981), and a "speculative" condition. Under some conditions, we show that Bitcoin prices form convergent supermartingales or submartingales and derive implications for monetary policy.

Keywords: Bitcoin, cryptocurrency, currency competition, Exchange Rates, Indeterminacy

JEL Classification: D50, E40, E42, E50

Suggested Citation

Schilling, Linda and Uhlig, Harald, Some Simple Bitcoin Economics (March 2018). CEPR Discussion Paper No. DP12831. Available at SSRN: https://ssrn.com/abstract=3155167

Linda Schilling (Contact Author)

Ecole Polytechnique- CREST ( email )

5 Avenue Henry Le Chatelier
Palaiseau, 91120
France

Harald Uhlig

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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