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Bitcoin: Technical Background and Data Analysis

Author

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  • Badev, Anton

    () (Board of Governors of the Federal Reserve System (U.S.))

  • Chen, Matthew

    () (Board of Governors of the Federal Reserve System (U.S.))

Abstract

This paper provides the necessary technical background to understand basic Bitcoin operations and documents a set of empirical regularities related to Bitcoin usage. We present the micro-structure of the Bitcoin transaction process and highlight the use of cryptography for the purposes of transaction security and distributed maintenance of a ledger. Using publicly available transaction-level data, we examine patterns of general usage together with usage by Satoshi Dice, the largest online gambling service using Bitcoin as the method of payment. Our analysis suggests that less than 50 percent of all bitcoins in circulation are used in transactions. About half of these transactions involve less than U.S.$100 equivalent, and for the period for which we have data for Satoshi Dice, most of these small-value transactions were related to the online gambling service. Relatively less frequent large value transactions drive the average transaction value to levels above U.S.$40,00 0 equivalent value, and are not likely to involve payments for goods and services. Bitcoin exchange rates exhibit somewhat complicated dynamics. In the past 24 months, the USD-BTC exchange rate increased more than 50-fold. The daily variance of the USD-BTC exchange rate remained remarkably stable for this same period, once the variance calculations account for the changing exchange rate level. We also document that the exchange rates between bitcoin and other major currencies are not well aligned. We interpret this as lack of depth of the exchange markets and as costly exchange rather than as unexploited arbitrage opportunities. Finally, we examine the economic incentives for the participants in the distributed implementation of the Bitcoin scheme.

Suggested Citation

  • Badev, Anton & Chen, Matthew, 2014. "Bitcoin: Technical Background and Data Analysis," Finance and Economics Discussion Series 2014-104, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2014-104
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    References listed on IDEAS

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    1. Lo, Stephanie & Wang, J. Christina, 2014. "Bitcoin as money?," Current Policy Perspectives 14-4, Federal Reserve Bank of Boston.
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    Cited by:

    1. Anna Iwona Piotrowska, 2016. "Fields Of Potential Use Of Cryptocurrencies In The Payment Services Market In Poland – Results Of An Empirical Study," Copernican Journal of Finance & Accounting, Uniwersytet Mikolaja Kopernika, vol. 5(2), pages 201-217.
    2. Marc Rysman & Scott Schuh, 2017. "New Innovations in Payments," Innovation Policy and the Economy, University of Chicago Press, vol. 17(1), pages 27-48.
    3. Linda Schilling & Harald Uhlig, 2018. "Some Simple Bitcoin Economics," NBER Working Papers 24483, National Bureau of Economic Research, Inc.
    4. Anna Iwona Piotrowska & Dariusz Piotrowski, 2017. "Barriers to the functioning of the bitcoin system ? user assessment," Proceedings of Economics and Finance Conferences 4807736, International Institute of Social and Economic Sciences.
    5. Pieters, Gina & Vivanco, Sofia, 2017. "Financial regulations and price inconsistencies across Bitcoin markets," Information Economics and Policy, Elsevier, vol. 39(C), pages 1-14.
    6. Fantazzini, Dean & Nigmatullin, Erik & Sukhanovskaya, Vera & Ivliev, Sergey, 2016. "Everything you always wanted to know about bitcoin modelling but were afraid to ask. I," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 44, pages 5-24.
    7. repec:spt:apfiba:v:7:y:2017:i:3:f:7_3_4 is not listed on IDEAS
    8. Wilko Bolt & Maarten van Oordt, 2016. "On the Value of Virtual Currencies," Staff Working Papers 16-42, Bank of Canada.
    9. William Roberds, 2016. "Review of Making Money: Coin, Currency, and the Coming of Capitalism by Christine Desan," Journal of Economic Literature, American Economic Association, vol. 54(3), pages 906-921, September.
    10. Greene, Claire & Schuh, Scott & Stavins, Joanna, 2016. "The 2014 survey of consumer payment choice: summary results," Research Data Report 16-3, Federal Reserve Bank of Boston.
    11. Beata Szetela & Grzegorz Mentel & Stanislaw Gedek, 2016. "Dependency analysis between Bitcoin and selected global currencies," Dynamic Econometric Models, Uniwersytet Mikolaja Kopernika, vol. 16, pages 133-144.
    12. Christopher S. Henry & Kim P. Huynh & Gradon Nicholls, 2017. "Bitcoin Awareness and Usage in Canada," Staff Working Papers 17-56, Bank of Canada.
    13. Jaroslav Bukovina & Matus Marticek, 2016. "Sentiment and Bitcoin Volatility," MENDELU Working Papers in Business and Economics 2016-58, Mendel University in Brno, Faculty of Business and Economics.

    More about this item

    Keywords

    Bitcoin; Payment systems; virtual currency;

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