Some Simple Bitcoin Economics
46 Pages Posted: 5 Apr 2018
There 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: Suggested Citation
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Some Simple Bitcoin Economics
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