This paper discusses the potential and limitations of Bitcoin as a digital currency. Bitcoin as a digital asset has been extensively discussed from the viewpoints of engineering and security design. But there are few economic analyses of Bitcoin as a currency. Bitcoin was designed as a payments vehicle and as a store of value (or speculation). It has no use bar as money or currency. Despite recent enthusiasm for Bitcoin, it seems very unlikely that currencies provided by central banks are at risk of being replaced, primarily because of the market price instability of Bitcoin (i.e. the exchange rate against the major currencies). We diagnose the instability of market price of Bitcoin as being a symptom of the lack of flexibility in the Bitcoin supply schedule ‐ a predetermined algorithm in which the proof of work is the major driving force. This paper explores the problem of instability from the viewpoint of economics and suggests a new monetary policy rule (i.e. monetary policy without a central bank) for stabilizing the values of Bitcoin and other cryptocurrencies.
The spectacular rise late last year in the price of Bitcoin, the dominant virtual currency, has attracted much public attention as well as scholarly interest. This policy brief discusses how some features of Bitcoin, as designed and executed to date, have hampered its ability to perform the functions required of a fiat money??as a medium of exchange, unit of account, and store of value. Furthermore, we document how various forms of intermediaries have emerged and evolved within the Bitcoin network, particularly noting the convergence toward concentrated processing, both on and off the blockchain. We argue that much of this process would have been predicted by established theories of financial intermediation, and we consider the theories? implication for the future evolution of intermediaries serving users of Bitcoin or alternative virtual currencies. We then compare Bitcoin with other innovations to facilitate payment services, from competing alternative digital currencies to electronic payment protocols. We conclude with a broad consideration of the major factors that will likely shape the future development of Bitcoin versus other alternative payment systems. We predict that Bitcoin?s lasting legacy will be the innovations it has spurred to payment technology, although the payment system will remain dominated by large processors because of economies of scale.
The Bitcoin Market Potential Index conceptualizes and ranks the potential utility of bitcoin across 178 countries to show where the cryptocurrency has the greatest relative potential for adoption. The index utilizes a data set with 40 variables from the following areas: technology penetration, international remittances, inflation, informal economy, financial repression, financial crises (historical), and bitcoin penetration. Standardized and re-scaled country level data both indicate that Argentina and Sub-Saharan Africa are the country and region, respectively, where bitcoin has the greatest potential for adoption. It is argued that regulation could have an important effect on bitcoin adoption but that it should be excluded as an index variable for now due to insufficient data and uncertainty over its short-term directional impact and longer-term consequences.
In this paper we discuss Bitcoin, the leader among the existing cryptocurrencies, to analyse its trends, success factors, current challenges and probable solutions to make it even better. In the introduction section, we discuss the history and working mechanism of Bitcoin. In the background section, we develop the ideas that evolved in the process of making a stable cryptocurrency. We also analyze the survey matrices of the present day cryptocurrencies. This survey clearly shows that Bitcoin is the clear winner among its kind. Section 3 is about the success factors of Bitcoin and the proceeding sections are a discussion about current challenges which pose as hurdles in making Bitcoin a better currency in the digital world. We finally discuss the balance between anonymity and reduced trust in the cryptocurrency world, before concluding the survey.
We present a thorough empirical analysis of market impact on the Bitcoin/USD exchange market using a complete dataset that allows us to reconstruct more than one million metaorders. We empirically confirm the "square-root law'' for market impact, which holds on four decades in spite of the quasi-absence of statistical arbitrage and market marking strategies. We show that the square-root impact holds during the whole trajectory of a metaorder and not only for the final execution price. We also attempt to decompose the order flow into an "informed'' and "uninformed'' component, the latter leading to an almost complete long-term decay of impact. This study sheds light on the hypotheses and predictions of several market impact models recently proposed in the literature and promotes heterogeneous agent models as promising candidates to explain price impact on the Bitcoin market -- and, we believe, on other markets as well.
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.
Are there differences between the sale of an unopened Super Mario Bros. computer game and of the digital collage of 5,000 images? Viewed from the perspective of the doctrine of exhaustion, we can easily conclude that the two transfers have significant differences. The auction of the tangible data carrier of the Super Mario’s 1986 edition (for $660,000) 1 fits well into the doctrine. The auction of the NFT (non-fungible token) representing Beeple’s “Everdays: the First 5000 Days” (for an equivalent of an astounding $69.3 million) 2 seems to be hype with a snowball effect rather than a modern encapsulation of digital exhaustion. Some commentators, 3 including the present author in collaboration with Alexandra Giannapoulou, João Pedro Quintais, and Balázs Bodó, 4 have thoroughly introduced the incompatibility of the NFT mania with the existing copyright status quo, and so – in connection with the present book’s topic – the sale of tokenized information, which is capable of representing information related to digital artworks, is practically excluded from the scope of the exhaustion of the right of distribution. At the same time, NFTs de facto offer a “code-based digital ecosystem that has practical consequences for the copyright-relevant fields of creativeness.” 5 The sale and resale of NFTs is possible; an exchange of information and title to “own” and “trade” information related to copyrightable subject matter is technologically guaranteed. In line with that, a quasi-exhaustion regime has also emerged. As such, the NFT mania can practically evidence the need for and modern technology’s capability of offering digital marketplaces for artworks as well.
We present a construction for non-interactive zero-knowledge proofs of knowledge in the random oracle model from general sigma-protocols. Our construction is secure against quantum adversaries. Prior constructions (by Fiat-Shamir and by Fischlin) are only known to be secure against classical adversaries, and Ambainis, Rosmanis, Unruh (FOCS 2014) gave evidence that those constructions might not be secure against quantum adversaries in general. To prove security of our constructions, we additionally develop new techniques for adaptively programming the quantum random oracle.
It is a widely spread belief that crypto-currencies implementing a proof of stake transaction validation system are less vulnerable to a 51% attack than crypto-currencies implementing a proof of work transaction validation system. In this article, we show that it is not the case and that, in fact, if the attacker's motivation is large enough (and this is common knowledge), he will succeed in his attack at no cost.
Iddo Bentov, Charles Lee, Alex Mizrahi, Meni Rosenfeld
We propose a new protocol for a cryptocurrency, that builds upon the Bitcoin protocol by combining its Proof of Work component with a Proof of Stake type of system. Our Proof of Activity (PoA) protocol offers good security against possibly practical future attacks on Bitcoin, and has a relatively low penalty in terms of network communication and storage space. We explore various attack scenarios and suggest remedies to potential vulnerabilities of the PoA protocol, as well as evaluate the performance of its core subroutine. 1
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 á 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.
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 – 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.
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.
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). …
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.
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.
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.
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 “written” 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.