DP12831 | Some simple Bitcoin Economics

Publication Date

03/30/2018

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Abstract

How do Bitcoin prices evolve? What are the consequences for monetary policy? We answer these questions in a novel, yet simple endowment economy. There are two types of money, both useful for transactions: Bitcoins and Dollars. A central bank keeps the real value of Dollars constant, while Bitcoin production is decentralized via proof-of-work. We obtain a ``fundamental condition’’, which is a version of the exchange-rate indeterminacy result in Kareken-Wallace (1981), and a ``speculative'' condition. Under some conditions, we show that Bitcoin prices form convergent supermartingales or submartingales and derive implications for monetary policy.