Some Simple Bitcoin Economics
59 Pages Posted: 4 Apr 2018 Last revised: 14 Jan 2021
There are 3 versions of this paper
Some Simple Bitcoin Economics
Some Simple Bitcoin Economics
Some Simple Bitcoin Economics
Date Written: May 11, 2019
Abstract
In an endowment economy, we analyze coexistence and competition between traditional fiat money (Dollar) and cryptocurrency (Bitcoin). Agents can trade consumption goods in either currency or hold on to currency for speculative purposes. A central bank ensures a Dollar inflation target, while Bitcoin mining is decentralized via proof-of-work. We analyze Bitcoin price evolution and interaction between the Bitcoin price and monetary policy which targets the Dollar. We obtain a fundamental pricing equation, which in its simplest form implies that Bitcoin prices form a martingale. We derive conditions, under which Bitcoin speculation cannot happen, and the fundamental pricing equation must hold. We explicitly construct examples for equilibria
Keywords: Cryptocurrency, Bitcoin, Currency Competition, Exchange rates, Indeterminacy
JEL Classification: D50, E42, E40, E50
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