Some Simple Bitcoin Economics

Linda Schilling and Harald Uhlig ()

No 24483, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: D50 E40 E42 E50 (search for similar items in EconPapers)
Date: 2018-04
New Economics Papers: this item is included in nep-mac, nep-mon and nep-pay
Note: AP EFG IFM ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

Published as Linda Schilling & Harald Uhlig, 2019. "Some simple Bitcoin Economics," Journal of Monetary Economics, .

Downloads: (external link)
http://www.nber.org/papers/w24483.pdf (application/pdf)

Related works:
Journal Article: Some simple bitcoin economics (2019)
Working Paper: Some simple Bitcoin Economics (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:24483

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w24483

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().