Some Simple Bitcoin Economics

60 Pages Posted: 12 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: April 2018


In a novel model of an endowment economy, we analyze coexistence and competition between traditional fiat money (Dollar) and another intrinsically worthless medium of exchange, not controlled by a central bank, such as 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 show that the block rewards are not a tax on Bitcoin holders: they are financed by Dollar taxes imposed by the Dollar central bank. We discuss monetary policy implications and characterize the range of equilibria.

Suggested Citation

Schilling, Linda and Uhlig, Harald, Some Simple Bitcoin Economics (April 2018). NBER Working Paper No. w24483. Available at SSRN:

Linda Schilling (Contact Author)

Ecole Polytechnique- CREST ( email )

5 Avenue Henry Le Chatelier
Palaiseau, 91120

Harald Uhlig

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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