IDEAS home Printed from https://ideas.repec.org/a/eee/finsta/v17y2015icp81-91.html
   My bibliography  Save this article

The economics of Bitcoin and similar private digital currencies

Author

Listed:
  • Dwyer, Gerald P.

Abstract

Recent innovations have made it feasible to transfer private digital currency without the intervention of an organization such as a bank. Any currency must prevent users from spending their balances more than once, which is easier said than done with purely digital currencies. Current digital currencies such as Bitcoin use peer-to-peer networks and open source software to stop double spending and create finality of transactions. This paper explains how the use of these technologies and limitation of the quantity produced can create an equilibrium in which a digital currency has a positive value. This paper also summarizes the rise of 24/7 trading on computerized markets in Bitcoin in which there are no brokers or other agents. The average monthly volatility of returns on Bitcoin is higher than for gold or a set of foreign currencies in dollars, but the lowest monthly volatilities for Bitcoin are less than the highest monthly volatilities for gold and the foreign currencies.

Suggested Citation

  • Dwyer, Gerald P., 2015. "The economics of Bitcoin and similar private digital currencies," Journal of Financial Stability, Elsevier, vol. 17(C), pages 81-91.
    • Handle: RePEc:eee:finsta:v:17:y:2015:i:c:p:81-91
    DOI: 10.1016/j.jfs.2014.11.006
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1572308914001259
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jfs.2014.11.006?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Joshua S. Gans & Hanna Halaburda, 2015. "Some Economics of Private Digital Currency," NBER Chapters, in: Economic Analysis of the Digital Economy, pages 257-276, National Bureau of Economic Research, Inc.
    2. Josh Lerner & Jean Tirole, 2002. "Some Simple Economics of Open Source," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 197-234, June.
    3. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August.
    4. Berentsen, Aleksander, 2006. "On the private provision of fiat currency," European Economic Review, Elsevier, vol. 50(7), pages 1683-1698, October.
    5. Dwyer Jr., Gerald P. & Samartín, Margarita, 2009. "Why do banks promise to pay par on demand?," Journal of Financial Stability, Elsevier, vol. 5(2), pages 147-169, June.
    6. Marimon, Ramon & Nicolini, Juan Pablo & Teles, Pedro, 2012. "Money is an experience good: Competition and trust in the private provision of money," Journal of Monetary Economics, Elsevier, vol. 59(8), pages 815-825.
    7. David Yermack, 2013. "Is Bitcoin a Real Currency? An economic appraisal," NBER Working Papers 19747, National Bureau of Economic Research, Inc.
    8. Klein, Benjamin, 1974. "The Competitive Supply of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(4), pages 423-453, November.
    9. Harold Demsetz, 1968. "The Cost of Transacting," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 82(1), pages 33-53.
    10. William J. Luther, 2013. "Friedman Versus Hayek on Private Outside Monies: New Evidence for the Debate," Economic Affairs, Wiley Blackwell, vol. 33(1), pages 127-135, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dwyer, Gerald P, 2014. "The Economics of Private Digital Currency," MPRA Paper 55824, University Library of Munich, Germany.
    2. Waknis, Parag, 2017. "Competitive Supply of Money in a New Monetarist Model," MPRA Paper 75401, University Library of Munich, Germany.
    3. Almosova, Anna, 2018. "A Monetary Model of Blockchain," IRTG 1792 Discussion Papers 2018-008, Humboldt University of Berlin, International Research Training Group 1792 "High Dimensional Nonstationary Time Series".
    4. Jesús Fernández‐Villaverde, 2018. "Cryptocurrencies: A Crash Course in Digital Monetary Economics," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 51(4), pages 514-526, December.
    5. Almosova, Anna, 2018. "A Monetary Model of Blockchain," VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181502, Verein für Socialpolitik / German Economic Association.
    6. Almosova, Anna, 2018. "A Note on Cryptocurrencies and Currency Competition," IRTG 1792 Discussion Papers 2018-006, Humboldt University of Berlin, International Research Training Group 1792 "High Dimensional Nonstationary Time Series".
    7. Christie Smith & Aaron Kumar, 2018. "Crypto‐Currencies – An Introduction To Not‐So‐Funny Moneys," Journal of Economic Surveys, Wiley Blackwell, vol. 32(5), pages 1531-1559, December.
    8. Hanna Halaburda & Guillaume Haeringer & Joshua Gans & Neil Gandal, 2022. "The Microeconomics of Cryptocurrencies," Journal of Economic Literature, American Economic Association, vol. 60(3), pages 971-1013, September.
    9. Emmanuel Farhi & Matteo Maggiori, 2018. "A Model of the International Monetary System," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 133(1), pages 295-355.
    10. Daniel Sanches, 2016. "On the Inherent Instability of Private Money," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 198-214, April.
    11. Cong, Lin William & Li, Ye & Wang, Neng, 2022. "Token-based platform finance," Journal of Financial Economics, Elsevier, vol. 144(3), pages 972-991.
    12. Huberman, Gur & Leshno, Jacob D. & Moallemi, Ciamac, 2017. "Monopoly without a monopolist: An economic analysis of the bitcoin payment system," Bank of Finland Research Discussion Papers 27/2017, Bank of Finland.
    13. repec:zbw:bofrdp:2017_027 is not listed on IDEAS
    14. van Buggenum, Hugo & Gersbach, Hans & Zelzner, Sebastian, 2023. "Contagious Stablecoins?," CEPR Discussion Papers 18521, C.E.P.R. Discussion Papers.
    15. Holthausen, Cornelia & Monnet, Cyril, 2003. "Money and payments: a modern perspective," Working Paper Series 245, European Central Bank.
    16. Joshua S. Gans, 2024. "Cryptic Regulation of Crypto-Tokens," Entrepreneurship and Innovation Policy and the Economy, University of Chicago Press, vol. 3(1), pages 139-163.
    17. Pierpaolo Benigno, 2023. "Monetary Policy in a World of Cryptocurrencies," Journal of the European Economic Association, European Economic Association, vol. 21(4), pages 1363-1396.
    18. Holtfort, Thomas & Horsch, Andreas & Schwarz, Joachim, 2022. "Economic, technological and social drivers of cryptocurrency market evolution and its managerial impact," Freiberg Working Papers 2022/01, TU Bergakademie Freiberg, Faculty of Economics and Business Administration.
    19. Fernández-Villaverde, Jesús & Sanches, Daniel, 2019. "Can currency competition work?," Journal of Monetary Economics, Elsevier, vol. 106(C), pages 1-15.
    20. Morten Linnemann Bech & Rodney Garratt, 2017. "Central bank cryptocurrencies," BIS Quarterly Review, Bank for International Settlements, September.
    21. Franz Seitz & Markus A. Schmidt, 2014. "Money In Modern Macro Models: A Review of the Arguments," Journal of Reviews on Global Economics, Lifescience Global, vol. 3, pages 156-174.

    More about this item

    Keywords

    Bitcoin; Emoney; Private currency; Cryptocurrency; Block chain;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finsta:v:17:y:2015:i:c:p:81-91. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jfstabil .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.