Some Simple Bitcoin Economics

59 Pages Posted: 4 Apr 2018 Last revised: 14 Jan 2021

See all articles by Linda Schilling

Linda Schilling

Washington University in Saint Louis, John M. Olin Business School

Harald Uhlig

University of Chicago - Department of Economics

Multiple version iconThere are 3 versions of this paper

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

Suggested Citation

Schilling, Linda and Uhlig, Harald, Some Simple Bitcoin Economics (May 11, 2019). Becker Friedman Institute for Research in Economics Working Paper No. 2018-21, Available at SSRN: https://ssrn.com/abstract=3155310 or http://dx.doi.org/10.2139/ssrn.3155310

Linda Schilling (Contact Author)

Washington University in Saint Louis, John M. Olin Business School ( email )

Harald Uhlig

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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