An economic analysis of the bitcoin payment system

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Content:

• The Truth About Blockchain
• Monopoly Without a Monopolist: An Economic Analysis of Bitcoin
• Economics of bitcoin
• Monopoly without a monopolist : an economic analysis of the bitcoin payment system
• Bitcoin in the economics and finance literature: a survey
• Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System
• Are Bitcoin and other digital currencies the future of money?
• Replication data for: An Economist's Perspective on the Bitcoin Payment System
• Monopoly without a monopolist : An economic analysis of the bitcoin payment system
• Article Info.

WATCH RELATED VIDEO: The Economics of the Bitcoin Payment System

The Truth About Blockchain

Dit artikel is ook beschikbaar in het Nederlands. May 11, , by Wim Boonstra. In recent months the price of Bitcoin has risen sharply on balance, despite some fluctuations. Pressing questions are coming up. Is Bitcoin money or not? Why is Bitcoin valuable? And what does the future hold? Skeptics anticipate a collapse at some point, while true crypto believers see Bitcoin as the currency of the future.

The discussions about Bitcoin are very broad and opinion is divided on even its most basic aspects. For example, Bitcoin was designed to be a payment method, but more and more people have come to view it mainly as a new investment category.

In this special, I will attempt to answer some of the pressing questions about Bitcoin, without the least intention of even trying to settle them definitively. The main perspective I take here is that of an economist.

Because regardless of all the innovation unleashed by the arrival of Bitcoin which appears set to cause permanent changes to the financial system, some of the economic claims being thrown about deserve, at the very least, closer consideration. Some of them are just plain wrong. And it is not easy to verify claims and news. I will subject a few such news facts to further scrutiny in this special. Money is frequently defined as follows: something is money if it is generally accepted within a specific society as a unit of account, a payment medium, or a store of wealth.

This definition is not entirely adequate, since in a developed economy, money can be used not only as a unit of account, as a means to pay for goods and services and to accrue savings, but one should also be able to use it for borrowing money or issuing a bond.

If we take this definition of money as our starting point, we can review the various elements. Bitcoin can be used as a payment medium, but its overall acceptance is limited to Bitcoin believers. This group can be likened to a sort of society that is spread across the world and has become pretty big.

But it does not overlap with a real Bitcoin economy. In fact, there hardly is one. In this light, Bitcoin is not unlike a foreign currency, but one without an economy to support it. This feature makes Bitcoin and other cryptocurrencies fairly unique.

There are relatively few companies that accept payments in Bitcoin. In early February , Elon Musk announced that soon, you would be able to buy a Tesla with Bitcoin, but the next person that the same news item interviewed was a Tesla dealer who strongly denied that his business would accept such payments.

On March 23, Musk put his Bitcoin where his mouth is. For the meantime only in the U. To begin with Tesla will not accept other cryptos, but that could very well change. On March 20, , the Dutch newspaper NRC reported that approximately companies in the Netherlands accept Bitcoin as a means of payment, noting that, for many, this above all is related to marketing campaigns.

In practice, they only execute a few transactions a year. Public acceptance of Bitcoin still has a long way to go, even if several million people across the globe have their own so-called wallet. Therefore, Bitcoin definitely has value see below, too but to turn that value into cash, which is undifferentiated purchasing power, it first has to be converted into regular money, like dollars or euros. As a unit of account, Bitcoin only works if valued in a regular currency.

Whether or not inflation occurs in the Bitcoin world is an open question. No information exists on the subject. Bitcoin prices do not exist within a Bitcoin economy as an allocation mechanism, or at least not perceptibly, on which more later. It takes some effort to see Bitcoin as a regular investment asset too. The profit generates a return, and if the amount of money grows in line with real economic activity, investors can cash in on it.

Bitcoin works differently. We have seen that Bitcoin can increase or decrease strongly in value, but it is a closed system. In part, this is because of the deflationary characteristics of Bitcoin. How much Bitcoin is available is predetermined and ultimately limited. Therefore, the ROI of Bitcoin is only related to the price of the Bitcoin itself, expressed in regular currency. Without the inflow of new money, investors in Bitcoin cannot reap their return in regular currency.

In this, Bitcoin shares some resemblance to a pyramid scheme. At the same time, commentators regularly point out that price manipulation can occur in the Bitcoin system, when a few big parties manipulate the price for their own gain.

The market for Bitcoin is relatively illiquid compared to the traditional financial markets, which means, unfortunately, that it lends itself well to such manipulation. Of course, the same can be said of an asset class like precious metals, too. They often have only limited value in regular economic activity, even though they have industrial applications and can be used to make jewelry. Cowrie shells and Rai stones cannot even make this claim and just like Bitcoin, their value can plummet to zero.

Even gold was pushed from its pedestal temporarily in the 19 th century by the advent of aluminum. Early perspectives on aluminum considered it an exceptionally remarkable new metal. Napoleon III even replaced the golden tableware he used at state banquets temporarily with the new-fangled aluminum. Gold and silver have traditionally played an important role as safe investments that are relatively easy to exchange for currency.

They still do. If the government backs a currency as a means of payment, in a normal economy, it greatly helps to increase general acceptance. So the news that taxes could be paid in Bitcoin and Ethereum in Switzerland was welcomed in crypto circles. Closer examination, however, reveals that this news is less spectacular than it first appears. It was the canton of Zug that opened the possibility of paying taxes in Bitcoin, something that was already possible in a few Swiss cities.

But the tax assessment simply reads in Swiss francs. And the tax authorities just want to be paid in francs. However, people can convert their cryptos into francs through a designated crypto company with which the tax assessment can be paid. After all, local governments keep their books in the national currency. Not so spectacular, then. At any time people can decide to convert illiquid assets, such as gold, stocks, real estate, or cryptos, into regular money to pay a bill.

That has now been made a little easier for Bitcoin users. The fact that Bitcoin also has some characteristics of a zero-sum game, limits its use in day-to-day-transactions. Regular money can be used for more than just payments, it can at the same time be borrowed or invested. With Bitcoin, it is the price that ultimately determines the return, positive and negative. A great deal of attention is going to those people who got into Bitcoin in early ; they can now collect a profit thanks to the current, much higher price.

But someone who, say, took out a mortgage loan in Bitcoin would have seen their debt explode in terms of regular money and would likely now be bankrupt. Incidentally, I am unaware whether many people have taken out Bitcoin loans.

The underlying problem, therefore, is that there is no underlying Bitcoin economy in all costs and revenues are in Bitcoin. That said, Bitcoin fulfills the function as a store of wealth rather well, but its high volatility also makes it high risk.

Therefore the most important possible role that Bitcoin could have in the future financial system is as an asset class. Things are as valuable as the worth we attach to them. This may seem like a lazy definition, but it is not. Clearly, some goods exist that are considered valuable because they are useful. Early money standards, for example in Egypt, were based on grain. In Virginia, the money system was based on tobacco for centuries.

The intrinsic value of metal coins depends on which metal is used to mint it, like copper, iron, silver, and gold. But most money has no practical application other than fulfilling the role of money. One very old money standard was based on massive stones Rai , while the longest functioning money standard throughout a large geographical area was based on Cowry shells. Besides dental crowns and jewels, gold has few practical applications and paper money is completely worthless the minute that no-one will accept it.

Traditional fiat money has no physical form. The same is true for Bitcoin. As long as enough people believe in Bitcoin and are prepared to pay regular money for it, Bitcoin has value. If people stop believing in it, Bitcoin becomes worthless.

As noted, Bitcoin shares this characteristic with other types of fiduciary money, like the aforementioned Rai, shells, or currency and fiat money. However, that trust in money can be revoked if, during times of hyperinflation, trust in the government is utterly destroyed, as in Zimbabwe in see Figure 1 or, more recently, in Venezuela.

Some people anticipate that the value of Bitcoin can rise much, much higher, to a million dollars even. If asked whether this is possible, I can only say: yes, it could. The value of Bitcoin could even rise to as much as two million dollars, or more. But it might not, because the chance that the value of Bitcoin could suddenly crash, even to zero, is arguably just as likely. As I have explained, the value of Bitcoin is completely determined by the value its enthusiasts attach to it.

Hypes can go very far, though. Back in the 17 th century when Tulip Mania was sweeping the Netherlands, there was one type of tulip bulb that was worth so much you could trade it for a fine canal house in Amsterdam.

Monopoly Without a Monopolist: An Economic Analysis of Bitcoin

Chapters discuss the creation of the EU single market for e-payments and combine legal analysis with comparative case studies in their exploration of the regulatory challenges surrounding e-payments. The contributing authors analyse the key economic and legal issues of the development of bitcoin and mobile payments within the EU framework through a comparative lens. They cover topics ranging from user data and funds protection and the stability of the payment system to the competitiveness of the EU market. Providing a comprehensive and methodological guide to the bitcoin and mobile payments in Europe, this book will prove an illuminating and informative read for academics, students and policy makers with an interest in the impact of innovation on payment systems. Springer Professional.

Economics of bitcoin

High-tech enables payment evolution and global competition. The ambiguities surrounding of the digital currency still leave enough space for the analysis of its unreserved acceptance, trust and anticipation, which are the main driver for the spread of the network. Banks should carefully consider the technology underlying these cryptocurrencies as a potential generic new way of transferring ownership of the value over the long term. The chapter provides an analysis of the use of cryptocurrencies in general, especially Bitcoin as the technology adoption in the presence of network externalities. Further, the chapter explores financial privacy which is very sensitive issue in using digital currency or cryptocurrency and discuss about private choices versus political rules. The research has shown that the future of cryptocurrencies can be bright if some institutional-formal conditions are met due to the fact that success evolution of e-money requires building safety payments through three criteria—standardization, compatibility and innovation. Blockchain and Cryptocurrencies. Electronic money is not a new phenomenon. Trade over the Internet has increased the use of new technologies, thereby increasing the demand for new electronic payment methods.

Monopoly without a monopolist : an economic analysis of the bitcoin payment system

Author: Jacob Leshno. Bitcoin was introduced in as a computer protocol establishing a decentralized system that allows users to hold balances and make transfers to one another Nakamoto Computer systems that provided similar services have existed for decades, but required a trusted party to control and operate them. For example, PayPal Holdings Inc.

Bitcoin in the economics and finance literature: a survey

The size of the reward tends towards zero over time, ensuring an absolute limit of 21 million on the quantity of Bitcoin in existence. According to its supporters, Bitcoin has two advantages over existing currencies. The first is that its supply is limited, making it impossible for a central authority to issue it in quantities that would devalue it. This means it is much less vulnerable to hyperinflation crises, such as those seen in Weimar Germany, Zimbabwe or Venezuela. But a limited supply can also be a weakness, as it makes it impossible to control deflation — a phenomenon that can also lead to very severe economic consequences Bordo and Filardo, The second claimed advantage of Bitcoin is that all transactions are permanent and immutable.

Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System

Bitcoin is a digital asset [1] designed by its purported inventor, Satoshi Nakamoto , to work as a currency. Since Bitcoin's first appearance in , it has generated a wide variety of responses and analyses. Bitcoin is a digital asset [1] designed by its inventor, Satoshi Nakamoto , to work as a currency. The question whether bitcoin is a currency or not is disputed. Classification of bitcoin by the United States government is to date unclear with multiple conflicting rulings.

Are Bitcoin and other digital currencies the future of money?

This work is licensed under a Creative Commons Attribution 4. The emergence of Bitcoin in has received considerable attention surrounding the validity of cryptocurrencies as a viable and, in some jurisdictions, a legal currency alternative. Despite widespread concern that these cryptocurrencies are fostering the environment within which a substantial bubble can occur, it is important to analyze whether these new assets are behaving similarly to major international currencies.

Replication data for: An Economist's Perspective on the Bitcoin Payment System

RELATED VIDEO: EC'21: Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System

The rapid worldwide spread of COVID forced many countries to enforce complete lockdown and strict quarantine policies. The strict lockdown and quarantine affect the psychological state of people toward cryptocurrency. The current research aims to examine the effect of COVID on Bitcoin prices concerning cumulative deaths and confirmed cases. This research employed the augmented Dickey-Fuller test to check the stationarity of data, the co-integration test for the interdependency of variables, and the vector error correction model for identifying the direction and long or short-run relationship between Bitcoin prices and COVID A unidirectional relationship between Bitcoin prices and cumulative deaths is also observed.

Monopoly without a monopolist : An economic analysis of the bitcoin payment system

Monopoly without a monopolist: An economic analysis of the bitcoin payment system. Huberman, Gur Leshno, Jacob D. Moallemi, Ciamac. Owned by nobody and controlled by an almost immutable protocol the Bitcoin payment system is a platform with two main constituencies: users and profit seeking miners who maintain the system's infrastructure. The paper seeks to understand the economics of the system: How does the system raise revenue to pay for its infrastructure? How are usage fees determined? How much infrastructure is deployed?

Article Info.

Blockchain promises to solve this problem. The technology behind bitcoin, blockchain is an open, distributed ledger that records transactions safely, permanently, and very efficiently. For instance, while the transfer of a share of stock can now take up to a week, with blockchain it could happen in seconds.