Bitcoin as Decentralized Money: Prices, Mining, and Network Security
68 Pages Posted: 15 Nov 2018 Last revised: 20 Feb 2020
Date Written: February 16, 2020
We address the determination of bitcoin prices in a decentralized monetary economy. Users forecast the transactional and resale value of bitcoin holdings and price the risk of malicious system attacks. Miners contribute resources that enhance protection against attackers and compete for block rewards. We show that Bitcoin’s security 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 the quantity theory. Price-security feedback effects can amplify the volatility impact of fundamental shocks, and lead to boom-bust cycles not driven by fundamentals.
Keywords: bitcoin, blockchain, cryptocurrencies, volatility, bubbles, mining, asset prices, inflation, decentralization, networks
JEL Classification: E40, E42, G12, G15, G18
Suggested Citation: Suggested Citation