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 â 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.
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.
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
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.
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.
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.
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 .
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)
Florian Glaser, Kai Zimmermann, Martin Haferkorn, Moritz Weber ¡ 5 authors
Digital currencies are a globally spreading phenomenon that is frequntly and also prominently addressed by media, venture capitalists, financial and governmental institutions alike. As exchange prices for Bitcoin have reached multiple peaks within 2013, we pose a prevailing and yet academically unaddressed qustion: What are users' intentions when changing their domestic into a digital currency? In particular, this paper aims at giving empirical insights on whether usersĂ´ interest regarding digital currencies is driven by its appeal as an asset or as a currency. Based on our evaluation, we find strong indications that especially uninformed users approaching digital currencies are not primarily interested in an alternative transaction system but seek to participate in an alternative investment vehicle.
Digital payment schemes show an ever increasing importance. Out of the countless different schemes available this article focuses on the popular Bitcoin system. The authors provide a description of Bitcoin's unique technological basis and its accompanying ecosystem of users, miners, trading platforms and vendors. Furthermore, this article discusses Bitcoin's currency-like features and the first regulatory actions take in the European Union and in the United States of America.
A virtual currency can be defined as a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community. The recent developments in widely spread internet and data mining activities, highlighted the issue of accepting and using virtual currencies for different purposes, including, buying commodities or services, saving, as well as converting into real currencies, such as US dollars, euro or other currencies. One of the most controversial and the most advanced virtual currency scheme to date is the one so-called Bitcoin, designed and implemented by the Japanese programmer Satoshi Nakamoto in 2009. Although the use of Bitcoin might have positive impact on financial innovation and the provision of additional payment alternatives to consumers, it also might increase the risks in financial payments, exchange rates of real currencies, as well as increase the possibility of money laundering, using them for illegal deeds. Therefore , the purpose of this paper to clarify the main characteristic of Bitcoin, and analyze its positive aspects as well as the threats that may occur to the modern world economy , in case the usage of this money , significantly increases .
In January 2009 the Japanese software-designer SATOSHI NAKAMOTO invented a virtual currency named Bitcoin and released software for managing transactions in the new money.It consists solely of bits and bytes, but we cannot see it as a coin or banknote on the market.There is no cover in terms of gold or stocks, for example -in fact, nothing but the source code of the software which consists of thirty-one thousand lines of code.NAKAMOTO wanted to create a currency immune to potentially predatory bankers and politicians and so the currency and the mechanism to acquire Bitcoin were controlled entirely by software.The payment system is completely decentralised and so contains no central organisation which monitors transactions.Many people use this new currency to pay for services or products on the Internet, since it is no less safe than traditional payment systems.In this paper I will first introduce the basic parameters and functions of the alternative currency, and will deal especially with security and privacy issues relating to the virtual money.After that I will examine the value of Bitcoin on the online market, especially answering questions such as how we can acquire it.After this the legal background will be presented and suggestions made for its possible regulation, whilst its likely role in criminal behaviour is suggested.The paper was written in order to stimulate interest in this special, new currency, its working mechanisms, advantages and possible dangers, and because it represents a unique paradigm-shift, not simply in cyberspace, but in real-world payment systems also.
This bachelor's thesis focuses on the digital currency called Bitcoin. The theoretical part discusses the concept of money (its history, issuance, the gold standard, etc.) as well as central banking and local currencies. It also tackles the concept of Bitcoin itself, the way it functions, its advantages and disadvantages and its issuance (so-called mining). The practical part discusses whether or not it is possible to profit through bitcoin mining, by speculating on its relative value to the (US) dollar and if it is possible for Bitcoin to replace traditional payment systems and currencies in the future (or at least prove itself to be a potent competitor).
The human innovation in the field of monetary freedom takes shape in the virtual communities. Developed and implemented through a decentralized algorithm, the bitcoin project has so far proved itself a success in the field of virtual currency. Beyond the technical part of operation, in this paper we will analyse the theoretical principles underlying the bitcoin. This study shows that the bitcoin largely meets the role of natural money of gold and silver, in compliance to the free marketâs behaviour. This allows us to observe the fact that people are aware of the negative implications the stateâs intervention has in the monetary filed, thus deciding to create and use their own currency in online transactions.
Cryptocurrencies are digital alternatives to traditional governmentâissued paper monies. Given the current state of technology and skepticism regarding the future purchasing power of existing monies, why have cryptocurrencies failed to gain widespread acceptance? I offer an explanation based on network effects and switching costs. In order to articulate the problem that agents considering cryptocurrencies face, I employ a simple model developed by Dowd and Greenaway (1993) (Dowd, K., and D. Greenaway. âCurrency Competition, Network Externalities, and Switching Costs: Towards an Alternative View of Optimum Currency Areas.â The Economic Journal , 103(420), 1993, 1180â89). The model demonstrates that agents may fail to adopt an alternative currency when network effects and switching costs are present, even if all agents agree that the prevailing currency is inferior. The limited success of bitcoinâalmost certainly the most popular cryptocurrency to dateâserves to illustrate. After briefly surveying episodes of successful monetary transition, I conclude that cryptocurrencies like bitcoin are unlikely to generate widespread acceptance in the absence of either significant monetary instability or government support. ( JEL E40, E41, E42, E49)
We maintain that the crypto-currency bitcoin is a practical application of what is termed âmemoryâ in the monetary economics literature. After reviewing the theoretical literature on money and memory, we offer a brief overview of the bitcoin protocol and argue that, like memory, bitcoin functions as a public record-keeping device. Finally, we provide evidence that â in line with the standard theoretical account of memory â bitcoin use has soared as the expected cost of storing traditional monies increased.
This paper reexamines the Barro growth model taking into account status-seeking behavior. Agents care about both consumption and social status, which is determined by their relative consumption in society. Public capital as production input is financed by income tax or lumpsum tax. We discuss different measures to reach the optimal growth and optimal welfare in a decentralized economy and find that under some parameter conditions, there are some government sizes for which the decentralized growth is optimal, and this result does not require corrective taxation policy. We also find the superiority of income tax versus lump-sum tax from the point of view of optimal growth in a decentralized economy and of social welfare. Besides, we propose corrective tax programs with constant capital tax or subsidy and time-varying consumption tax that enable an economy to reach the first-best optimal growth. The extension to a congestion model modifies somewhat the results. We discuss conditions under which the first-best or the secondbest optimal growth is attained in a decentralized economy.
Modern engineering and social systems are often too complex to be managed by a centralized agent. Instead, such systems are commonly structured with multiple decentralized agents each responsible for managing a subset of the system, but the resulting system performance depends on the aggregate of the decisions made by decentralized agents. Local agents' decision makings often exhibit selfish behavior as they seek to optimize their own objectives under their localized models, which if left uncoordinated can lead to substantial loss of efficiency compared with the system that can be optimized by a single (hypothetical) centralized agent. In this dissertation, we seek to study the fundamental issues of how to efficiently manage large-scale and multi-agent stochastic dynamic systems, especially on how to device efficient coordination mechanisms that would optimize system performance under various constraints that are unique to decentralized systems.In the first part of this dissertation we study decentralized control of a general class of stochastic dynamic resource allocation problems that have many applications. We consider a stochastic system in which multiple decentralized agents allocate shared system resources in response to customer requests that arrive stochastically over time. Each agent is responsible for a subset of the allocation decisions which it makes according to a dynamic allocation policy obtained by maximizing his own expected profit subject to a potentially mis-specified model of the way in which shared resources are consumed by other agents. We introduce the notion of a transfer contract which specifies how agents compensate one another whenever resources are consumed and establish the existence of contracts under which the decentralized system has no efficiency loss relative to centralized optimality. We also show that this property is insensitive to mis-specification by each agent of the dynamics of resource consumption by others in the system. An explicit characterization of the optimal transfer contract and an iterative decentralized algorithm for computing it is also provided. In the language of duality, contracts are analogous to shadow prices and the iterative algorithm has the favor of a dual update method, but strong duality and convergence of the iterative algorithm to the set of optimal contracts are guaranteed without assumptions of convexity.In the second part of this dissertation we study a class of related decentralized control problems but specialize to portfolio and risk management. Many financial institutions typically trade in multiple correlated markets. While centralized portfolio optimization over all trading decisions is ideal, it is generally not possible due to the complexity of each market, and firms typically adopt a decentralized setup in which trading in each market the responsibility of a particular desk. Decentralized portfolio optimization, however, is complicated by the fact that different agents are commonly only well informed about their own investment universe (proprietary research and forecasts, etc) and prefer to keep this private, and have their own incentives which they optimize on the basis of their limited models. It is well known, however, that the aggregate performance of such a system can be extremely inefficient due to the loss of diversification. In this dissertation, we formulate a multi-agent dynamic portfolio choice problem and study how to improve its efficiency. We show that an internal system of swap contracts, which define internal cash transfers between agents, can be used to facilitate risk sharing and induce agents to choose portfolios that as a collection are optimal for the firm. Conceptually using swap contracts is similar to performance benchmarking that is often employed in the finance literature for decentralized portfolio management, but our new approach offers a significant advantage in that the swap contracts can be constructed in decentralized manner without requiring an all-knowing central agent. We provide an explicit characterization of the optimal swap contracts and an iterative algorithm for computing them that can be implemented without compromising proprietary agent level data.Throughout this dissertation, we also discuss various important issues surrounding decentralized control of stochastic dynamic systems, including but not limited to approximation methods, performance attribution, sensitivity analysis, and fairness issues, etc.
To understand the relationship between experimental and behavioral economics, we need to go back to the late 1970s and early 1980s. In the 1970s, psychologists began conducting new kinds of experiments, the results of which seemed to falsify the assumption of rational individual behavior. This compelled experimental economists to stake out a position for the economics discipline regarding the results. Much to their surprise, their experiments corroborated the results of the psychologists. This led them to completely discard preference theory but at the same time to emphasize the role of the market as the mechanism that rationalizes individual behavior. An initially diverse and unorganized group of financial and other economists drew very different conclusions from these same experimental results. They saw them as proof of observed anomalies in financial markets and hailed Daniel Kahneman and Amos Tversky's prospect theory as the most important candidate for replacing the traditional microeconomic model of human behavior.
We study repeated games in which players have imperfect execution skill and one playerâs true skill is not common knowledge. In these settings the possibility arises of a player âhustlingâ, or pretending to have lower execution skill than they actually have. Focusing on repeated zero-sum games, we provide a hustle-proof strategy; this strategy maximizes a playerâs payoff, regardless of the true skill level of the other player. 1