Bitcoin price dynamics and hyperdeflation: A monetary theory approach

Abstract

The paper is deeply motivated by the need to explore the impressive Bitcoin price dynamics by addressing Bitcoin as money in its essential attribute as a medium of exchange. We differ from previous research on Bitcoin in investigating the Bitcoin price dynamics on the theoretical ground. First, we show that the impressive Bitcoin price development observed since its inception can be interpreted as a hyperdeflation. Second, we resort to a representative agent modelling strategy within a money-in-the-utility function framework capturing the role of Bitcoin as a medium of exchange. We show that the specific monetary features of Bitcoin, its constant nominal stock and divisibility down to eight decimal places, account for a strong possibility of speculative hyperdeflationary paths. Alternative scenarios of the dynamics of real Bitcoin balances are also open for discussion.