Decentralizing Money: Bitcoin Prices and Blockchain Security

Review of Financial Studies (forthcoming)

68 Pages Posted: 15 Nov 2018 Last revised: 14 Nov 2020

Date Written: September 18, 2020


We address the determination of bitcoin prices and decentralized security. Users forecast the transactional and resale value of holdings, pricing the risk of malicious systemic attacks. Miners contribute resources to protect against attackers, competing for block rewards. Bitcoin’s design leads to multiple equilibria: the same technology and fundamentals are consistent with sharply different price and security levels. Bitcoin’s monetary policy can lead to welfare losses and deviations from quantity theory. Price–security feedback amplifies fundamental shocks’ volatility impact and leads to boom–busts not driven by fundamentals. We show how Bitcoin’s viability versus fiat currency depends on relative acceptability and inflation protection.

Keywords: bitcoin, blockchain, cryptocurrencies, volatility, bubbles, mining, asset prices, inflation, decentralization, networks

JEL Classification: E40, E42, G12, G15, G18

Suggested Citation

Pagnotta, Emiliano, Decentralizing Money: Bitcoin Prices and Blockchain Security (September 18, 2020). Review of Financial Studies (forthcoming), Available at SSRN: or

Emiliano Pagnotta (Contact Author)

Singapore Management University ( email )

Li Ka Shing Library
70 Stamford Road
Singapore, 178899


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