Bitcoin as Decentralized Money: Prices, Mining, and Network Security

65 Pages Posted: 15 Nov 2018 Last revised: 11 Dec 2018

Date Written: July 12, 2018


We address the determination and evolution of bitcoin prices in a simple monetary economy that captures the salient features of a decentralized network. Network users forecast the trans- actional and resale value of bitcoin holdings and consider the risk of a network attack. Miners contribute resources that enhance network security and compete for mining rewards received in units of the same unbacked token. In equilibrium, the overall production of network security and the bitcoin price are jointly determined. We characterize how the network technologies and participants, users and miners, affect the number and dynamic stability properties of equilibria. We find that the relation between bitcoin prices and the supply growth rate is not monotonic: the same price is consistent with different rates. The model’s outcomes demonstrate how intrinsic price–security feedback effects can amplify or moderate the price volatility effect of demand shocks. We find rational patterns of price momentum, and that small and large stochastic bubbles can exist in general equilibrium and show how the probability of bursting decreases with the bitcoin price.

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

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

Suggested Citation

Pagnotta, Emiliano, Bitcoin as Decentralized Money: Prices, Mining, and Network Security (July 12, 2018). Available at SSRN: or

Emiliano Pagnotta (Contact Author)

Imperial College Business School ( email )

Imperial College Business School, Tanaka Building
London, SW7 2AZ
Great Britain
+447478734028 (Phone)

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