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

Pagnotta, Emiliano, Bitcoin as Decentralized Money: Prices, Mining, and Network Security (February 16, 2020). 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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