The Market for Bitcoin Transactions

42 Pages Posted: 5 May 2020 Last revised: 12 Oct 2020

See all articles by Kwok Ping Tsang

Kwok Ping Tsang

Virginia Polytechnic Institute & State University

Zichao Yang

Virginia Polytechnic Institute & State University - Department of Economics

Date Written: October 11, 2020

Abstract

Transaction fees in the bitcoin system work differently from those in conventional payment systems due to the design of the bitcoin mining algorithm. In particular, transaction fees and transaction volume in the bitcoin system increase whenever the network is congested, and our VAR results confirm that is indeed the case. To account for the empirical findings, we build a model where users and miners together determine transaction fees and transaction volume. Even though the mechanism of fluctuating transaction fees in bitcoin introduces an extra cost of uncertainty to users, a back-of-envelope calculation shows that the cost of using the bitcoin network for transactions is still smaller than the cost of using the current conventional payment system with a fixed transaction fee rate. However, this calculation may underestimate the cost due to the crowding-out effect on small transactions during the congested period.

Keywords: Bitcoin, Transaction Fees, Congestion, Vector Auto-regression

JEL Classification: C51, E42, E47, D6, O33

Suggested Citation

Tsang, Kwok Ping and Yang, Zichao, The Market for Bitcoin Transactions (October 11, 2020). Available at SSRN: https://ssrn.com/abstract=3554458 or http://dx.doi.org/10.2139/ssrn.3554458

Kwok Ping Tsang (Contact Author)

Virginia Polytechnic Institute & State University ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States

HOME PAGE: http://https://sites.google.com/site/byrontkp/

Zichao Yang

Virginia Polytechnic Institute & State University - Department of Economics ( email )

3021 Pamplin Hall
Blacksburg, VA 24061
United States

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