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Christopher Fink, Thomas Johann
No abstract is available for this record.
Turpin
Bitcoin is a virtual currency created by programmers, which is produced at a predetermined and knowable rate to simulate a limited resource. Its value is derived from the trust of its users and is protected by its limited nature and the cryptography by which the currency is secured and authenticated. Bitcoin has been, and continues to be, used by some for the purchase of illegal substances and in furtherance of crimes. Because Bitcoin is not issued by a central bank or government, its use entails risks, both legal and otherwise, that have not previously been explored. Nonetheless, Bitcoin possesses significant economic upside over traditional currencies and methods of transaction online. As a result, governments should further study Bitcoin and regulate businesses that exchange in Bitcoin, but without attempting to stop or slow the growth of the currency itself and without attacking otherwise law-abiding citizens who transact in Bitcoins.
Marcin Andrychowicz, Stefan Dziembowski, Daniel Malinowski, Ĺukasz Mazurek
Bitcoin is a peer-to-peer cryptographic currency system. Since its introduction in 2008, Bitcoin has gained noticeable popularity, mostly due to its following properties: (1) the transaction fees are very low, and (2) it is not controlled by any central authority, which in particular means that nobody can "print" the money to generate inflation. Moreover, the transaction syntax allows to create the so-called contracts, where a number of mutually-distrusting parties engage in a protocol to jointly perform some financial task, and the fairness of this process is guaranteed by the properties of Bitcoin. Although the Bitcoin contracts have several potential applications in the digital economy, so far they have not been widely used in real life. This is partly due to the fact that they are cumbersome to create and analyze, and hence risky to use. In this paper we propose to remedy this problem by using the methods originally developed for the computer-aided analysis for hardware and software systems, in particular those based on the timed automata. More concretely, we propose a framework for modeling the Bitcoin contracts using the timed automata in the UPPAAL model checker. Our method is general and can be used to model several contracts. As a proof-of-concept we use this framework to model some of the Bitcoin contracts from our recent previous work. We then automatically verify their security in UPPAAL, finding (and correcting) some subtle errors that were difficult to spot by the manual analysis. We hope that our work can draw the attention of the researchers working on formal modeling to the problem of the Bitcoin contract verification, and spark off more research on this topic.
Mitsuru Iwamura, Yukinobu Kitamura, Tsutomu Matsumoto
This paper overviews the entire landscape of Bitcoin-like cryptocurrencies. Bitcoin has not emerged out of cryptocurrency competition, but rather became a dominant currency as the first broad market based cryptocurrency. But there are more than a hundred of cryptocurrencies in the market, and some are catching up to Bitcoin. This is a healthy sign of currency competition ĂĄ la Hayek. Through this competition new technological and security innovations may emerge. In this paper, we point out potential problems with Bitcoin and propose some ideas for an alternative cryptocurrency.
Ferdinando M. Ametrano
Bitcoin has enabled competition between digital cryptocurrencies and traditional legal tender fiat currencies. Despite rapidly increasing acceptance, so far the affirmation of cryptocurrency as better money has been thwarted by dramatic deflationary price instability. Successful at disposing of any central monetary authority, bitcoin has elected to have a fixed deterministic inelastic monetary policy, establishing itself more as digital gold than as a currency. Price stability could be achieved by dynamically rebasing the outstanding amount of money: the number of cryptocurrency units in every digital wallet is adjusted instead of each single unit changing its value. The apparent awkwardness of this unfamiliar paradigm is discussed at length, proving that its only real novelty is about fairness and effectiveness. Furthermore, suggestions are provided about how to ease the effect of contractionary monetary policy. The proposed monetary base adjustment has neutral impact on the overall wallet wealth, as it does not introduce any arbitrary distortion into the intrinsic value dynamics of the wallet. The adjustment is based on a commodity price index determined with a resilient consensus process that does not rely on central third party authorities. It is posited in this paper that a digital cryptocurrency adopting elastic monetary standard is Hayek Money, so named from the Nobel Prize-winning economist: a good money standard providing stable prices for a new economic era.
Cameron Harwick
Though Bitcoin currently enjoys a healthy niche, the aspirations of many in the project are grander: to supplant the existing regime of fiat currencies with cryptocurrencies, and to do so outside of normal political channels. Its primary practical obstacle is its purchasing power volatility, arising from a rigid money stock in the face of wide swings in demand. Nevertheless, the historical example of gold, another (much more successful) money commodity with a more or less rigid supply, illuminates the institutional prerequisites for purchasing power stability, economic efficiency, and sustained growth â namely a market of financial intermediaries whose liabilities denominated in the base money themselves circulate as media of exchange. This paper discusses potential benefits and hurdles to establishing financial intermediation in cryptocurrency, as well as the possibility of managing the money supply to create a stable purchasing power cryptocurrency without the need for intermediation at all. Such schemes ultimately require an existing market of intermediaries in order to provide any benefits, the emergence of which governments are for the moment well-positioned to prevent.
Hanna HaĹaburda, Neil Gandal
We analyze how network effects affect competition in the nascent cryptocurrency market. We do so by examining the changes over time in exchange rate data among cryptocurrencies. Specifically, we look at two aspects: (1) competition among different currencies, and (2) competition among exchanges where those currencies are traded. Our data suggest that the winner-take-all effect is dominant early in the market. During this period, when Bitcoin becomes more valuable against the U.S. dollar, it also becomes more valuable against other cryptocurrencies. This trend is reversed in the later period. The data in the later period are consistent with the use of cryptocurrencies as financial assets (popularized by Bitcoin), and not consistent with "winner-take-all" dynamics.
Lawrence H. White
Cryptocurrencies like Biteoin are transferable digital assets, secured by cryptography. To date, all of them have been created by private individuals, organizations, or firms. Unlike bank account balances, they are not anyone's liability. They are not redeemable for any government fiat money such as Federal Reserve Notes or for any commodity money such as silver or gold coins. The cryptocurrency is thus a of competing private irredeemable monies (or would-be monies). Friedrich A. Hayek (1978a) and other economists over the last 40 years could only imagine how competition among issuers of private irredeemable monies would work. Today we have an actual study. In what follows I will discuss the main economic features of the market. I also discuss whether the is purely a bubble. As an introduction the topic, I offer the following comic verse about the contrast between Biteoin and the physical gold coins of the past: In the past, money's value was judged with our teeth; We bit coins confirm they were real. Now a Bitcoin's just data, no gold underneath. That's okay if it buys you a meal. (1) The Size and Composition of the Cryptocurrency Market Bitcoin rightly gets the lion's share of media attention, but it is not alone in the for cryptocurrencies. The authoritative website CoinMarketCap.com tracks the U.S. dollar price and total market (price per unit multiplied by number of units outstanding) for each of more than 500 traded cryptocurrencies. Bitcoin is the largest by far. On a recent day (March 9, 2015), the site showed Bitcoin trading at $291 per unit, with a cap of $4.05 billion. The second and third largest cryptocurrencies, Ripple and Litecoin, had caps respectively 8.5 percent and 1.8 percent as large. The entire set of non-Bitcoin cryptocurrencies (known as altcoins) had a cap of roughly $619 million, or 15 percent of Bitcoin's. Stated differently, Bitcoin had roughly 87 percent of the market, altcoins 13 percent. In percentage terms, altcoins do a higher share of Bitcoin's business than Bitcoin does of the Federal Reserve Note's business (currently $1.35 trillion in circulation). In trading volume the percentage share of altcoins (led by litecoin and Ripple) has been similar. The cryptocurrency has grown about fourfold in cap over the last 22 months, with altcoins growing faster than Bitcoin. This is seen by comparing recent data the oldest snapshot of the CoinMarketCap site available via the Internet Archive Wayback Machine, which reports data for May 9, 2013. On that date, Bitcoin had a price of $112 per unit, and a cap of $1.2 billion. The two largest altcoins at that time, Litecoin and Peercoin (aka PPCoin), had caps respectively 4.7 percent and 0.4 percent as large. Only 13 altcoins were listed. Jointly their cap was about 6 percent of Bitcoin's, giving Bitcoin 95 percent of the market. Since then, the share of altcoins has doubled, and their cap has grown ninefold. Trading volumes then were not reported. At $4.05 billion, the cap of Bitcoin, as of March 2015, was slightly smaller than the dollar value of the September 2014 monetary bases of the Lithuanian litas ($5.8 billion) and the Guatemalan quetzal ($5.5 billion), but larger than those of the Costa Rican colon ($3.3 billion) and the Serbia dinar ($3.3 billion). (2) The August 2014 figures from the Central Bank of the Bahamas do not provide the monetary base, but count Bahamian dollar currency in circulation at $210 million, less than two-thirds of Ripple's recent cap of around $344 million. Medium of Exchange, Store of Value, and Medium of Remittance Functions The retail use of Bitcoin as a medium of exchange for goods and services is small date, but is growing. In December 2014, Microsoft began accepting bitcoin payments to buy content such as games and videos on Xbox game consoles, add apps and services Windows phones or buy Microsoft software (BBC 2014). âŚ
Nicolas Houy
We study the economics of Bitcoin transaction fees in a simple static partial equilibrium model with the specificity that the system security is directly linked to the total computational power of miners. We show that any situation with a fixed fee is equivalent to another situation with a limited block size. In both cases, we give the optimal value of the transaction fee or of the block size. We also show that making the block size a non binding constraint and, in the same time, letting the fee be fixed as the outcome of a decentralized competitive market cannot guarantee the very existence of Bitcoin in the long-term.
Gus Gutoski, Douglas Stebila
No abstract is available for this record.
Anton Badev, Matthew Chen
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.
Jerry Brito, Houman B. Shadab, Andrea Castillo
The next major wave of Bitcoin regulation will likely be aimed at financial instruments, including securities and derivatives, as well as prediction markets and even gambling. While there are many easily regulated intermediaries when it comes to traditional securities and derivatives, emerging bitcoin-denominated instruments rely much less on traditional intermediaries such as banks and securities exchanges. Additionally, the block chain technology that Bitcoin introduced for the first time makes completely decentralized markets and exchanges possible, thus eliminating the need for intermediaries in complex financial transactions. In this Article we survey the type of financial instruments and transactions that will most likely be of interest to regulators, including traditional securities and derivatives, new bitcoin-denominated instruments, and completely decentralized markets and exchanges. We find that Bitcoin derivatives would likely not be subject to the full scope of regulation under the Commodity Exchange Act to the extent that such derivatives involve physical delivery (as opposed to cash settlement) or are non-fungible and not independently traded. We also find that some laws, including those aimed at online gambling, do not contemplate a payment method like Bitcoin, thus placing many transactions in a legal gray area. Following the approach to virtual currencies taken by the Financial Crimes Enforcement Network, we argue that other financial regulators should consider exempting or excluding certain financial transactions denominated in Bitcoin from the full scope of their regulations, much like private securities offerings and forward contracts are treated. We also suggest that to the extent that regulation and enforcement becomes more costly than its benefits, policymakers should consider and pursue strategies consistent with that new reality, such as efforts to encourage resilience and adaptation by existing institutions.
James J. Angel, Douglas M. McCabe
No abstract is available for this record.
William J. Luther, Lawrence H. White
At present, bitcoin is held mostly as a speculative vehicle, little used to pay for goods and services. Its value has been unstable, which impedes bitcoinâs wider use as a payment medium. We explain why the value of bitcoin has been so unstable. Then, we discuss entrepreneurial efforts that might enable bitcoin to become a more commonly accepted payment medium.
Angela Rogojanu, Liana Badea
The complexity and interdependence of the economies of various geographical and political entities have one generic binder - money. The economic history of the last century, replicated in the first decade of our century, can be âwrittenâ with money. Indeed, money, a multiple discovery of the civilization in its historical way, was and still is the guardian of hope for prosperity. The disputes about money clearly indicate the need, opportunity and the possibility of monetary competition, which would provide, from the point of view of entrepreneurs, the most suitable production of money based on expectations of their economic preferences. Increasingly more, theorists, practitioners and analysts bring to the fore the issue of simultaneously using the official currency and the digital one. Thus, the issue of the public debate regarding the private money is still of interest. Based on these considerations, this paper aims to highlight how the digital currency Bitcoin can meet the challenges of the economic environment, taking into account both the opportunities and the threats to which it is subject, and the records emphasized by the history of economic thought and adapted to the current reality.
Campbell R. Harvey
I will address eight common claims about bitcoin: 1. Physical bitcoins exist; 2. The founder of bitcoin is a person called Satoshi Nakamoto; 3. Bitcoin is mainly used for criminal activity; 4. A lack of security plagues bitcoin; 5. Mining is a waste of energy; 6. Bitcoin too small today to be an important economic force; 7. Bitcoin is currently too volatile to be viable; 8. Bitcoin is just another currency. For additional details beyond "Bitcoin Myths and Facts," I have another paper/slidedeck called "Cryptofinance" that goes deeper into the mechanics of cryptocurrencies. It is available at http://ssrn.com/abstract=2438299 .
Annika Baumann, Benjamin Fabian, Matthias Lischke
Bitcoin is a peer-to-peer (P2P) payment network running on a cryptographic protocol. Nodes of Bitcoin communicate to each other by broadcasting digitally signed messages to the network. Transactions are listed in a distributed, decentralized, public database referred to as the block, using a proof of work to reach consensus. The term âBitcoin networkâ refers to a set of nodes running the P2P protocol. The structure of the Bitcoin network is minimal with a decentralized network of volunteers. This chapter presents the overall process of Bitcoin networks including transactions, digital signatures, relay networks, and Bitcoin script.
David S. Evans
No abstract is available for this record.
Nicolas Houy
No abstract is available for this record.
Aaron Yelowitz, Matthew W. Wilson
The anonymity of Bitcoin prevents analysis of its users. We collect Google Trends data to examine determinants of interest in Bitcoin. Based on anecdotal evidence regarding Bitcoin users, we construct proxies for four possible clientele: computer programming enthusiasts, speculative investors, Libertarians and criminals. Computer programming and illegal activity search terms are positively correlated with Bitcoin interest, while Libertarian and investment terms are not.
Joshua R. Hendrickson, Thomas L. Hogan, William J. Luther
The recent proliferation of bitcoin has been a boon for users but might pose problems for governments. Indeed, some governments have already taken steps to ban or discourage the use of bitcoin. In a model with endogenous matching and random consumption preferences, we find multiple monetary equilibria including one in which bitcoin coexists with official currency. We then identify the conditions under which government transactions policy might deter the use of bitcoin. We show that such a policy becomes more difficult if some users strictly prefer bitcoin because they can avoid other users holding the official currency in the matching process. ( JEL C78, E41, E42, E50)
Christian Decker, Roger Wattenhofer
In Bitcoin, transaction malleability describes the fact that the signatures that prove the ownership of bitcoins being transferred in a transaction do not provide any integrity guarantee for the signatures themselves. This allows an attacker to mount a malleability attack in which it intercepts, modifies, and rebroadcasts a transaction, causing the transaction issuer to believe that the original transaction was not confirmed. In February 2014 MtGox, once the largest Bitcoin exchange, closed and filed for bankruptcy claiming that attackers used malleability attacks to drain its accounts. In this work we use traces of the Bitcoin network for over a year preceding the filing to show that, while the problem is real, there was no widespread use of malleability attacks before the closure of MtGox.
Michele Spagnuolo, Federico Maggi, Stefano Zanero
No abstract is available for this record.
MichaĹ Polasik, Anna Piotrowska, Tomasz Piotr Wisniewski, RadosĹaw Kotkowski ¡ 5 authors
Over recent years, interest has been growing in Bitcoin, an innovation that has the potential to play an important role in e-commerce and beyond. The aim of our paper is to provide a comprehensive empirical study of the payment and investment features of Bitcoin, and their implications for the conduct of e-commerce. Since network externality theory suggests that the value of a network and its take-up are interlinked, we investigate both adoption and price formation. We discover that its returns are driven primarily by Bitcoinâs popularity, the sentiment expressed in newspaper reports on cryptocurrency, and total number of transactions. The paper also reports on the first global survey of merchants who have adopted this technology, and we model the share of sales paid for with this alternative currency, using both ordinary and Tobit regressions. Our analysis examines how country-, customer-, and company-specific characteristics interact with the proportion of sales attributed to Bitcoin. We find that company features, use of other payment methods, customersâ knowledge about Bitcoin, and the size of both the official and unofficial economy are significant determinants. The results will be of interest to traders who seek to understand factors driving prices and will help to inform vendors as to the most favorable circumstances for adopting the currency for online transactions.