DP12831 Some simple Bitcoin Economics

Author(s):	Linda Marlene Schilling, Harald Uhlig
Publication Date:	March 2018
Keyword(s):	Bitcoin, cryptocurrency, currency competition, Exchange Rates, Indeterminacy
JEL(s):	D50, E40, E42, E50
Programme Areas:	Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=12831

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.