Bitcoin as Decentralized Money: Prices, Mining, and Network Security
57 Pages Posted: 15 Nov 2018 Last revised: 27 Jan 2020
Date Written: January 20, 2020
We address the determination and evolution of bitcoin prices in a decentralized monetary economy. Users forecast the transactional and resale value of bitcoin holdings and price the risk of a malicious system attack. Miners contribute resources that enhance protection against attackers and compete for mining 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 deterministic monetary policy can lead to welfare losses and deviations from the quantity theory. The outcomes demonstrate how price–security feedback effects in open blockchains can amplify the volatility impact of fundamental shocks, and also lead to boom-bust cycles not driven by any fundamentals.
Keywords: bitcoin, blockchain, cryptocurrencies, volatility, bubbles, mining, asset prices, inflation, decentralization, networks
JEL Classification: E40, E42, G12, G15, G18
Suggested Citation: Suggested Citation