NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Some Simple Bitcoin Economics

Linda Schilling, Harald Uhlig

NBER Working Paper No. 24483
Issued in April 2018, Revised in May 2019
NBER Program(s):Asset Pricing, Economic Fluctuations and Growth, International Finance and Macroeconomics, Monetary Economics

In a novel model of an endowment economy, we analyze coexistence and competition between traditional fiat money (Dollar) and another intrinsically worthless medium of exchange, not controlled by a central bank, such as Bitcoin. Agents can trade consumption goods in either currency or hold on to currency for speculative purposes. A central bank ensures a Dollar inflation target, while Bitcoin mining is decentralized via proof-of-work. We analyze Bitcoin price evolution and interaction between the Bitcoin price and monetary policy which targets the Dollar. We obtain a fundamental pricing equation, which in its simplest form implies that Bitcoin prices form a martingale. We derive conditions, under which Bitcoin speculation cannot happen, and the fundamental pricing equation must hold. We show that the block rewards are not a tax on Bitcoin holders: they are financed by Dollar taxes imposed by the Dollar central bank. We discuss monetary policy implications and characterize the range of equilibria.

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Document Object Identifier (DOI): 10.3386/w24483

 
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