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Coexistence of Bitcoin, fiat money, and risk-free bonds

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  • Divino, Jose Angelo
  • de Paiva, Matheus Silva

Abstract

This study analyzes the coexistence of Bitcoin, fiat money, and risk-free assets in a competitive, unregulated financial economy. Bitcoin is modeled as a hybrid crypto asset that functions as a store of value and as a source of liquidity services. We consider a Bitcoin-in-the-utility (BIU) specification and introduce exogenous shocks to Bitcoin preferences, Bitcoin production, fiat money supply, and aggregate output. The results reveal that fiat money is neutral in the long run, while Bitcoin is not; shocks to Bitcoin production affect real allocations and relative prices, and higher transaction fees dampen demand and lower Bitcoin price. Policymakers should account for the macroeconomic implications of Bitcoin’s widespread adoption, as it can influence monetary policy design, financial stability, and the regulatory environment.

Suggested Citation

  • Divino, Jose Angelo & de Paiva, Matheus Silva, 2025. "Coexistence of Bitcoin, fiat money, and risk-free bonds," Finance Research Letters, Elsevier, vol. 86(PF).
    • Handle: RePEc:eee:finlet:v:86:y:2025:i:pf:s1544612325020793
    DOI: 10.1016/j.frl.2025.108825
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    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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