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Some Simple Bitcoin Economics

Author

Listed:
  • Linda Schilling
  • Harald Uhlig

Abstract

In a novel model of an endowment economy, we analyze coexistence and competition between traditional fiat money (Dollar) and another intrinsically worthless medium of exchange, not controlled by a central bank, such as Bitcoin. Agents can trade consumption goods in either currency or hold on to currency for speculative purposes. A central bank ensures a Dollar inflation target, while Bitcoin mining is decentralized via proof-of-work. We analyze Bitcoin price evolution and interaction between the Bitcoin price and monetary policy which targets the Dollar. We obtain a fundamental pricing equation, which in its simplest form implies that Bitcoin prices form a martingale. We derive conditions, under which Bitcoin speculation cannot happen, and the fundamental pricing equation must hold. We show that the block rewards are not a tax on Bitcoin holders: they are financed by Dollar taxes imposed by the Dollar central bank. We discuss monetary policy implications and characterize the range of equilibria.

Suggested Citation

  • Linda Schilling & Harald Uhlig, 2018. "Some Simple Bitcoin Economics," NBER Working Papers 24483, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24483
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    References listed on IDEAS

    as
    1. Wilko Bolt & Maarten van Oordt, 2016. "On the Value of Virtual Currencies," Staff Working Papers 16-42, Bank of Canada.
    2. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    3. Simon Trimborn & Wolfgang Karl Härdle, 2015. "CRIX or evaluating Blockchain based currencies," SFB 649 Discussion Papers SFB649DP2015-048, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    4. 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 (US).
    5. Beat Weber, 2016. "Bitcoin and the legitimacy crisis of money," Cambridge Journal of Economics, Oxford University Press, vol. 40(1), pages 17-41.
    6. repec:oup:rfinst:v:32:y:2019:i:5:p:1798-1853. is not listed on IDEAS
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    Citations

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    Cited by:

    1. Jonathan Chiu & Mohammad Davoodalhosseini & Janet Hua Jiang & Yu Zhu, 2019. "Central Bank Digital Currency and Banking," Staff Working Papers 19-20, Bank of Canada.
    2. repec:bla:ausecr:v:51:y:2018:i:4:p:540-550 is not listed on IDEAS
    3. repec:zbw:svrwjg:201819 is not listed on IDEAS
    4. Benigno, Pierpaolo, 2019. "Monetary Policy in a World of Cryptocurrencies," CEPR Discussion Papers 13517, C.E.P.R. Discussion Papers.
    5. Bruno Biais & Albert Menkveld & Catherine Casamatta & Christophe Bisière & Matthieu Bouvard, 2019. "Equilibrium Bitcoin Pricing," 2019 Meeting Papers 360, Society for Economic Dynamics.
    6. Joseph Abadi & Markus Brunnermeier, 2018. "Blockchain Economics," NBER Working Papers 25407, National Bureau of Economic Research, Inc.
    7. Yu Zhu & Scott Hendry, 2019. "A Framework for Analyzing Monetary Policy in an Economy with E-money," Staff Working Papers 19-1, Bank of Canada.
    8. Auer, Raphael, 2019. "Beyond the Doomsday Economics of “Proof-of-Work” in Cryptocurrencies," Globalization Institute Working Papers 355, Federal Reserve Bank of Dallas.
    9. Alexander Brauneis & Roland Mestel & Ryan Riordan & Erik Theissen, 2018. "A High-Frequency Analysis of Bitcoin Markets," Working Paper Series, Social and Economic Sciences 2018-06, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
    10. repec:eee:intfin:v:61:y:2019:i:c:p:37-51 is not listed on IDEAS
    11. Emanuele Borgonovo & Stefano Caselli & Alessandra Cillo & Donato Masciandaro & Giovanno Rabitti, 2018. "Cryptocurrencies, central bank digital cash, traditional money: does privacy matter?," BAFFI CAREFIN Working Papers 1895, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    12. repec:eee:empfin:v:50:y:2019:i:c:p:1-19 is not listed on IDEAS
    13. Yukun Liu & Aleh Tsyvinski, 2018. "Risks and Returns of Cryptocurrency," NBER Working Papers 24877, National Bureau of Economic Research, Inc.
    14. Jonathan Chiu & Janet Hua Jiang & Seyed Mohammadreza Davoodalhosseini & Yu Zhu, 2019. "Central Bank Digital Currency and Banking," 2019 Meeting Papers 862, Society for Economic Dynamics.
    15. Carlo Gola & Andrea Caponera, 2019. "Policy issues on crypto-assets," LIUC Papers in Economics 2019-7, Cattaneo University (LIUC).
    16. Silvia Bartolucci & Andrei Kirilenko, 2019. "A Model of the Optimal Selection of Crypto Assets," Papers 1906.09632, arXiv.org.
    17. Kang, Kee-Youn, 2019. "Cryptocurrency, Delivery Lag, and Double Spending History," MPRA Paper 93598, University Library of Munich, Germany.
    18. Biais, Bruno & Bisière, Christophe & Bouvard, Matthieu & Casamatta, Catherine & Menkveld, Albert J., 2018. "Equilibrium Bitcoin Pricing," TSE Working Papers 18-973, Toulouse School of Economics (TSE).
    19. Anil Savio Kavuri & Alistair Milne, 2019. "FinTech and the future of financial services: What are the research gaps?," CAMA Working Papers 2019-18, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

    More about this item

    JEL classification:

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

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