The market for bitcoin transactions

Kwok Ping Tsang and Zichao Yang

Journal of International Financial Markets, Institutions and Money, 2021, vol. 71, issue C

Abstract: Transaction fees in the bitcoin system work differently from those in conventional payment systems due to the design of the bitcoin mining algorithm. In particular, transaction fees and transaction volume in the bitcoin system increase whenever the network is congested, and our VAR results confirm that is indeed the case. To account for the empirical findings, we build a model where users and miners together determine transaction fees and transaction volume. Even though the mechanism of fluctuating transaction fees in bitcoin introduces an extra cost of uncertainty to users, a back-of-envelope calculation shows that the cost of using the bitcoin network for transactions is still smaller than the cost of using the current conventional payment system with a fixed transaction fee rate. However, this calculation may underestimate the cost due to the crowding-out effect on small transactions during the congested period.

Keywords: Bitcoin; Transaction fees; Congestion; Vector autoregression (search for similar items in EconPapers)
JEL-codes: C51 D6 E42 E47 O33 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:71:y:2021:i:c:s1042443121000019

DOI: 10.1016/j.intfin.2021.101282

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