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The economics of Bitcoin and similar private digital currencies

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  • Dwyer, Gerald P.

Abstract

Recent innovations have made it feasible to transfer private digital currency without the intervention of an organization such as a bank. Any currency must prevent users from spending their balances more than once, which is easier said than done with purely digital currencies. Current digital currencies such as Bitcoin use peer-to-peer networks and open source software to stop double spending and create finality of transactions. This paper explains how the use of these technologies and limitation of the quantity produced can create an equilibrium in which a digital currency has a positive value. This paper also summarizes the rise of 24/7 trading on computerized markets in Bitcoin in which there are no brokers or other agents. The average monthly volatility of returns on Bitcoin is higher than for gold or a set of foreign currencies in dollars, but the lowest monthly volatilities for Bitcoin are less than the highest monthly volatilities for gold and the foreign currencies.

Suggested Citation

  • Dwyer, Gerald P., 2015. "The economics of Bitcoin and similar private digital currencies," Journal of Financial Stability, Elsevier, vol. 17(C), pages 81-91.
  • Handle: RePEc:eee:finsta:v:17:y:2015:i:c:p:81-91
    DOI: 10.1016/j.jfs.2014.11.006
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    References listed on IDEAS

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    1. William J. Luther, 2013. "Friedman Versus Hayek on Private Outside Monies: New Evidence for the Debate," Economic Affairs, Wiley Blackwell, vol. 33(1), pages 127-135, February.
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    8. Klein, Benjamin, 1974. "The Competitive Supply of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(4), pages 423-453, November.
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    More about this item

    Keywords

    Bitcoin; Emoney; Private currency; Cryptocurrency; Block chain;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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