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Is Bitcoin Really Frictionless?

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Abstract

Bitcoin is the most popular virtual currency yet developed. Proponents assert that bitcoin can remove frictions involved in payment and settlement systems by eliminating the need for the financial intermediaries that exist in traditional currencies. In this blog post, we show that while bitcoin transfers themselves are relatively frictionless for the user, there are significant frictions when bitcoins trade in exchange markets resulting in meaningful and persistent price differences across bitcoin exchanges. These exchange-related frictions reduce the incentive of market participants to use bitcoin as a payments alternative.

Suggested Citation

  • Alexander Kroeger & Asani Sarkar, 2016. "Is Bitcoin Really Frictionless?," Liberty Street Economics 20160323, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:87109
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    Cited by:

    1. Karau, Sören, 2023. "Monetary policy and Bitcoin," Journal of International Money and Finance, Elsevier, vol. 137(C).

    More about this item

    Keywords

    bitcoin; financial frictions; arbitrage;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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