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Some simple Bitcoin Economics

Author

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  • Uhlig, Harald
  • Schilling, Linda

Abstract

How do Bitcoin prices evolve? What are the consequences for monetary policy? We answer these questions in a novel, yet simple endowment economy. There are two types of money, both useful for transactions: Bitcoins and Dollars. A central bank keeps the real value of Dollars constant, while Bitcoin production is decentralized via proof-of-work. We obtain a ``fundamental condition’’, which is a version of the exchange-rate indeterminacy result in Kareken-Wallace (1981), and a ``speculative'' condition. Under some conditions, we show that Bitcoin prices form convergent supermartingales or submartingales and derive implications for monetary policy.

Suggested Citation

  • Uhlig, Harald & Schilling, Linda, 2018. "Some simple Bitcoin Economics," CEPR Discussion Papers 12831, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12831
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    More about this item

    Keywords

    Cryptocurrency; Bitcoin; Exchange rates; Currency competition; Indeterminacy;
    All these keywords.

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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