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Some simple Bitcoin Economics

Linda Schilling and Harald Uhlig

No 12831, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Bitcoin; cryptocurrency; currency competition; Exchange Rates; Indeterminacy (search for similar items in EconPapers)
JEL-codes: D50 E40 E42 E50 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-pay
Date: 2018-03
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