We address the determination of bitcoin prices and decentralized security. Users forecast the transactional and resale value of holdings, pricing the risk of malicious systemic attacks. Miners contribute resources to protect against attackers, competing for block rewards. Bitcoin’s design leads to multiple equilibria: the same technology and fundamentals are consistent with sharply different price and security levels. Bitcoin’s monetary policy can lead to welfare losses and deviations from quantity theory. Price–security feedback amplifies fundamental shocks’ volatility impact and leads to boom–busts not driven by fundamentals. We show how Bitcoin’s viability versus fiat currency depends on relative acceptability and inflation protection.

Decentralizing Money: Bitcoin Prices and Blockchain Security

This paper provides a systematic evaluation of the different types of digital currencies. We express skepticism regarding centralized digital currencies and therefore focus our economic analysis on private digital currencies. Specifically, we highlight the potential for private digital currencies to improve welfare within an emerging market with a selfish government. In that setting, we demonstrate that a private digital currency not only improves citizen welfare but also encourages local investment and enhances government welfare.

/pdf/how-do-private-digital-currencies-affect-government-policy-4xdc5irwyk.pdf

How Do Private Digital Currencies Affect Government Policy

Off-chain Bitcoin Trading Puzzle

How do cryptocurrency exchanges compete with each other? We show that small and large crypto exchanges appear to be complements, rather than substitutes, as traditional oligopoly theory would predict. When large exchanges list new tokens, trade volumes on small exchanges increase, and small exchanges become more likely to list. We rationalize these facts in a model where small exchanges have captive customer bases, and rely on arbitrage trade with large exchanges for liquidity provision. Our results imply that large exchanges’ listing decisions play a systemically important “leader” role in determining trade volumes and listings on other exchanges. ∗We thank Simon Trimborn, Yizhou Xiao, the wagmi chat, and seminar participants at CUHK and the Hong Kong Conference for Fintech, AI, and Big Data for helpful comments. We are especially grateful to Jinfei Sheng for comments that greatly improved the paper. We are grateful to Yichun He, Haichuan Wang, Wanyi Wang, and Chupei Zhang for excellent research assistance. †Fudan University, School of Economics; junyihu19@fudan.edu.cn. ‡University of Chicago, Booth School of Business; anthony.zhang@chicagobooth.edu.

Competition in the Cryptocurrency Exchange Market

This paper uncovers a novel phenomenon of flight-to-Bitcoin (FTB) whereby local demand for Bitcoin increases with local economic policy uncertainties. FTB holds across Bitcoin demand proxies including local premiums over the US market, turnover, and web traffic on cryptocurrency exchanges. We find that FTB is mainly driven by a lack of confidence in local authorities. Consistent with this interpretation, FTB is stronger during corruption incidents and Bitcoin ownership shifts from centralized exchanges to decentralized wallets amid turbulence. A comparison with safe-haven assets further differentiates FTB from other forms of flight-to-safety. The evidence collectively illustrates an overlooked motivation of Bitcoin investment: investors hold Bitcoin to mitigate their concerns about local authorities.

Flight to Bitcoin

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Flight to Bitcoin