1、Economics of Bitcoin is Bitcoin an alternative to fiat currencies and goldWU Vienna University of Economics and Business Diploma ThesisThesis title:Economics of Bitcoin: is Bitcoin an alternative to fiat currencies and gold?Author:Peter ?urdaStudent ID no.:9650205Academic program:Betriebswirtschaft
2、J151Advisor:Univ. Doz. Mag. Dr. Peter R. HaissWith this statement, I declare that this academic thesis: was written entirely by me, without the use of any sources other than those indicated and without the use of any unauthorized resources; has never been submitted in any form for evaluation as an e
3、xamination paper in Austria or any other country; is identical to the version submitted to my advisor for evaluation. DateSignature EconomicsofBitcoin:isBitcoinanalternativeto?atcurrenciesandgold?byPeter?urdaAdvisor:Univ.Doz.Mag.Dr.PeterR.Haiss/ssrn4/author=115752AbstractThispaperpresentsaneconomica
4、nalysisofBitcoinfromalibertarianpointofview.ThetheoreticalpartanalysestheapplicabilityoftheAustrianSchoolofEconomicsatBitcoin.Ofparticularinterestaretheevolutionofmoney,competitionamongmediaofexchange,andtheconceptofmoneysupply.Theempiricalpartanalysesthefollowingvariables:price,pricevolatility,liqu
5、idity,visibilityandvelocity.Icometotheconclusionthattheoretically,BitcoincanbeclosertotheAustrianidealofmoneythaneither?atmoneyorgold,anditispossiblethatitwillevolveintothatposition.TheresultsoftheempiricalanalysisareconsistentwithBitcoinbeingamediumofexchange.Keywords:Bitcoin,digitalcash,currencyco
6、mpetition,Austrianbusinesscycletheory,Misesregres-siontheoremJELCodes:E390,E410,E420,E510,G210Highlights:?Bitcoinemergedasamarket(catallactic)processandisevolving?Bitcoincanevolveintomoney?Bitcoincanpreventbusinesscyclesthroughinelasticsupplyofmoney?EmpiricalanalysisshowsthatBitcoinmaybeanimmatureme
7、diumofexchangeAcknowledgementsIwouldliketothankmythesisadvisor,Univ.Doz.Mag.Dr.PeterR.Haiss(/ssrn/author=115752).Heprovidedgreatguidance,keptmeontrackwithproperscienti?cresearchandprovidedinformationsourcesoutsideofmyownscopeofspecialisation.IwouldliketothanktheopponentsofsomeofmyviewsonBitcointhatI
8、debated,particularly:NielsVanderLinden,SmilingDave,DavidKramer,Atheros,DeathAndTaxes,JorgeTimn.IwouldliketothankpeoplefortheBitcoincommunitythatIwasincontactwithorwhoprovidedinterestinginsights:AmirTaaki,VladimirMarchenko,MeniRosenfeld,molecular,MoonShadow,MarekPalatinus,deepceleron,StephenGornick,P
9、ierreNoizat,JurajBednr,IainDavidStewart,MichaelParsons,MikeHearn,Je?Garzik.IwouldliketothanktheeconomistsItalkedto:GeorgeSelgin,WalterBlock,StephanKinsella,PhilippBagus,DavidGordon,PeterG.Klein,RobertP.Murphy,DetlevSchlichter,HansHermannHoppe,JohnBarrdear,JonMatonis,KoenSwinkles.Aspecialthanksgoesto
10、SatoshiNakamotofordesigningBitcoin.JohnTobeyforAbe OpenSourceblockchainexplorerknocko? whichIusedforanalysingtheblockchaindata.Mt.Goxforthetradedataandhistoricalexchangerates.FelixTendlerforhistoricalMt.Goxorderbookdata.Lastbutnotleast,Iwouldliketothankmymother,0#ffff66Doc.RNDr.Viera?urdov,CSc.,andm
11、ywife,SeahLayChee.1Contents1Introduction41.1Methodologicalcomments.52CurrentstatusofBitcoin72.1ComponentsofBitcoin(inthenarrowersense).72.2Socioeconomice?ectsofBitcoin82.3FormsofBitcoin92.3.1Nativeforms102.3.2Financialinstruments.162.4ProductsandservicesofthebroaderBitcoinecosystem.182.5Advancedfeat
12、uresofBitcoin.192.6Summary203TheoreticalanalysisofBitcoin213.1Functionsofmoney.213.2Austrianclassi?cationsystemformoney.233.2.1Moneyinthenarrowersense.233.2.2Moneysubstitutes.233.2.3Classi?cationofBitcoin263.2.4Complementarycurrencies.273.3Evolutionofmoneyascompetitionamongmediaofexchange.283.3.1Liq
13、uidity(networke?ect,doublecoincidenceofwants).303.3.2Storeofvalue.303.3.3Transactioncostsinthenarrowersense.323.3.4SummaryofBitcoincompetingwithothercurrenciesandpaymentsystems.373.4IfBitcoinfails,whatwouldreplaceit?373.5Misesregressiontheorem.383.5.1Introduction.383.5.2Selfsustainabilityofmediaofex
14、changewithoutnon-monetaryde-mand393.5.3Summaryandreformulationoftheregressiontheorem.403.6TheoriginofthepriceofBitcoin(applicationoftheregressiontheorem).413.6.1Supplyside.413.6.2Demandside4223.6.3Emergenceofmarketprice.423.6.4Emergenceofliquidity.423.6.5Criticalmass.433.7AustrianBusinessCycleTheory
15、,fractionalreservebanking,moneysupplyandBitcoin.433.7.1Moneysupply433.7.2Emergenceofmoneysubstitutes.453.7.3MoneysupplyofBitcoin.463.7.4Alternativemethodsforavoidanceofcreditexpansion.473.8Conclusion494EmpiricalanalysisofBitcoin504.1Priceandvisibility.504.1.1Price.504.1.2Visibility504.1.3Correlation
16、betweenpriceandvisibility.524.2Liquidityandpricevolatility.544.2.1Liquidity544.2.2Evolutionofliquidityovertime554.2.3Pricevolatility.644.2.4Correlationbetweenliquidityandpricevolatility644.2.5Correlationbetweenpriceandliquidity694.3Velocityofcirculation.724.3.1Velocityofothercurrencies734.3.2Analysi
17、s.754.4Conclusionofempiricalanalysis765Conclusion77ListofTables79ListofFigures80IndexandAbbreviations82Bibliography843Chapter1IntroductionWhiletherehavebeenattemptstoanalysetheeconomicpropertiesofBitcoin,particularlyfromwithintheonlineBitcoincommunity,suchasGringandGrigg(2011),Pattison(2011),Hamache
18、randKatzenbeisser(2011),Beckeretal.(2012)orBabaio?etal.(2012),thesefollowverynarrowpathsandmissthebroadercontext.MyowngoalwastoanalyseBitcoinfromalibertarianviewandtoanswertheresearchquestion,whetherBitcoinisanalternativeto?atcurrenciesandgold.Fromthepointofviewofmarketactors,Bitcoincanbeinterpreted
19、asade-centralisedclearingmechanism,basedonavirtualunit(called bitcoin withalowercase b ).Theclearingiscontrolledbyasymmetriccryptography,thepublickeyidentifyinganaccount,whileacorrespondingprivatekeyallowssendingbalancesfromthataccount.Inadditiontoclearing,Bitcoinalsocontainsaninelasticproductionfun
20、ction.Clearingmechanismtogetherwithade?nedsupplyallowsBitcointobeusedasamediumofexchange.Severalnameshavebeenproposedforsuchmediaofexchange,forexample virtualcurrency (EuropeanCentralBank(2012), digitalcash (Tanaka(1996), cryptocur-rency (Elias(2011).Forthepurposesofthisthesis,theexactnameisnotimpor
21、tant,rathertheeconomicfeaturesare.Iwilluse ?atmoney torefertoamonetarysystemsimilartotheonethatexistsnow.Iwillusedtheterm gold and goldstandard torefertoasystembasedonaphysicalcommoditychosenbyamarkettobeamediumofexchange(itthusrefersnotonlytogolddirectlybutalsosilverorotherphysicalcommodities),fore
22、xamplehistoricalgoldstandards,orhypotheticalsystemsbasedonreformssuchastheonedescribedbyRothbard(2005)orSelgin(1988).InChapter2,IpresentBitcoinasitis,describingitsworkingsandthehistoricalandexistingproductsandservicesassociatedwithBitcoin.IexplainhowBitcoincanandisused.Theinformationpresentedisofqua
23、litativenature,andallowstobuildamentalpictureofthe visible partoftheBitcoinecosystem.Iattempttoprovideanswerstothequestions whatwas and whatis .Iattempttoputitinabroadercontext,sothatthepotentialofBitcoinisclari?ed.InChapter3IfollowupwithinterpretingBitcointhrougheconomictheory(mainlyaccordingtotheA
24、ustrianSchoolofEconomics),attempttoclassifyitandformulatecriteriawhichin?uenceitsevolution.Ofparticularinterestaretheevolutionofmoney,competitionamongmediaofexchange,andtheconceptofmoneysupply.ThispartisnotstrictlyBitcoinspeci?c,italsoappliestosomehypotheticalfuturetypesofmoney.Iattempttoprovidethea
25、nswertothequestions why and how ,fromalibertarian,ratheranti-?at-money,anti-fractional-4reserve-bankingpointofviewandarguethatthetheoreticalfoundationofBitcoinisclosertotheAustriansSchoolidealofmoneythaneitherthe?atmoneyorgold.Lastly,inChapter4,IanalyseseveralaspectsofBitcoinquantitatively.Thevariab
26、lesanalysedareprice,pricevolatility,liquidity,visibility(meaninghowintensivethepublicperceptionofBitcoinis)andvelocityofcirculation.Theempiricalanalysisisanattempttoprovidesupportforit.Thethesis?nishesupwithaconclusioninChapter5whereIsummarisemy?ndings.1.1MethodologicalcommentsBeforeapproachingtheto
27、picinmoredepth,Iwouldliketoprovidesomebackgroundforthemethodologyusedandmymotivation.LargepartsofthisthesisarebasedontheteachingsoftheAustrianeconomicschool.Thereareseveralreasonsforthis.Asforthesubjectiveones,itistheschoolIamfamiliarwiththemost,andthatI?ndmyselfinmostagreementwith.Butthereisanobjec
28、tivereasonaswell.ItisthesameaspresentedbyNorth(2011): ThistheoryofendogenousmoneyisuniquetoMisesandhisfollowers.Nootherschoolofeconomicopinionacceptsit.EveryotherschoolappealstotheState,asanexogenouscoercivepower,toregulatethemoneysupplyandcreateenoughnew?atorcreditmoneytokeepthefreemarketoperationa
29、latnearlyfullemploymentwithnearlystableprices.EveryothertheoryofmoneyinvokestheuseoftheStatesmonopolisticpowertosupplytheoptimumquantityofmoney. emphasisaddedSimilarly,Salerno(2010)writes: Needlesstosay,thethreemodernmacroeconomicschoolsunderexaminationallstaunchlysupporttheideathatsupplyofmoneyneed
30、stobecentralizedunderapoliticalmonopoly. Inotherwords,withrespecttotheintroductionofamoneythroughmarketforcesandpeoplebeingabletovoluntarilychoosewhichmoneytouse,economicschoolsotherthantheAustriandonothavemuchtosay.Nevertheless,occasionallytheybreakthistrendandanalysesomeaspectofmoneyundertheassump
31、tionthatthesetwoconditionsarepresent.Buteventhen,theystilltendtocontinuewiththeideologicaltrendofseeingthisassomethingaprioriproblematicandsomethingthatneedstobeaddressedviaapolicyaction.ExampleswouldbeKrugman(1980),Levy-Yeyati(2004)orCataoandTerrones(2000).Furthermore,twooftheeconomistswhopublicise
32、dthesofarbroadestresearchofBitcoin,JonMatonisandMichaelSuede,subscribetotheAustrianSchool.EventhoughtheirBitcoin-speci?cworkhasnotbeenpublishedbypeer-reviewedjournals,itisrefer-encedbytheEuropeanCentralBank(2012),notingthat ThetheoreticalrootsofBitcoincanbefoundintheAustrianschoolofeco-nomicsanditsc
33、riticismofthecurrent?atmoneysystemandinterventionsundertakenbygovernmentsandotheragencies,which,intheirview,resultinexacerbatedbusinesscyclesandmassivein?ation. 5Nevertheless,IdonotmakeheretheargumentthattheAustriansarecorrect(andcon-versely,otherschoolsarewrong).IammerelyanalysingBitcoinfroma(mainl
34、y)Austrianpointofview.Furthermore,asMises(1999)argues: Thereisnomeanstoestablishanaposterioritheoryofhumanconductandsocialevents.Historycanneitherprovenordisproveanygeneralstatementinthemannerinwhichthenaturalsciencesacceptorrejectahypothesisonthegroundoflaboratoryexperiments.Neitherexperimentalveri
35、?cationnorexperimentalfalsi?cationofageneralpropositionispossibleinits?eld. Therefore,scholarsoftheAustrianSchoolshouldviewmyquantitativeempiricalresearchasanamendment,ratherthananargument.6Chapter2CurrentstatusofBitcoin2.1ComponentsofBitcoin(inthenarrowersense)Inthenarrowersense(asaclearingmechanis
36、m),Bitcoinconsistsoftwovirtualcompo-nents.The?rstoneisaledger,calledthe blockchain .Thisledgerisdistributed,andeverycomputerconnectedtotheBitcoinnetworkdirectly(calleda node )hasafullcopy1.Clearingtransactionsarepooledintobiggerchunkscalled blocks .Theblocksareorderedsequentiallyandthissequenceisthe
37、ledger.Hencethetermblockchain,asequentialorder(orachain)ofblocks.Thepropersequenceaswellasconsistencyisupheldbycryptography.Theothervirtualcomponentsare keypairs .Akeypairconsistsoftwolargenumbers( keys )thataremathematicallyrelated.Thisrelationshipallowstheapersonwhoknowsoneofthesenumberstoperforma
38、nactionthattheknoweroftheothernumbercanverify,butcannotrecreatethemselves(asthatwouldrequirecalculatingtheotherkey,whichisprohibitivelycomplex).Ananalogywouldbeaspeciallockwhichallowstwokeystobeinserted,keyAonlybeingabletolockit,andkeyBonlybeingabletounlockit.IftheholderofthekeyAlocksthelock,thehold
39、erofthekeyBcanunlockthelock,thusverifyingthattheholderofthekeyAlockeditbeforehand.ButtheholderofthekeyBcannotlockthelockthemselves,nordoesholdingofthekeyBmakeiteasiertorecreatekeyA.Ifoneofthekeysinapairiskeptsecretwhiletheotheronedivulged,thisallowstheholderofthesecretkeytoprovetothegeneralpublictha
40、thehasit.Insuchacase,thesecretkeyiscalled privatekey andthedivulgedkeyiscalled publickey .Thisisoftenusedtoverifytheauthenticityoftheotherparty.ForBitcoin,thepublickeyidenti?esaBitcoin address (similartoaccountnumberinabank),whiletheprivatekeyallowstocreatetransactions belonging tothisaddress.IfBitc
41、oinonlyallowedclearingtransactions,itcouldnotwork,astherewouldbenobalancestotransfer.Therefore,aspecialtypeoftransactionispermittedonceperblock,which creates newbitcoins(colloquiallyreferredtoas mining ).Theallowedamountofnewbitcoinsineachblockispredeterminedanddegressiveovertime.Anamountdi?erentfro
42、mthepredeterminedoneisnotconsistentwiththeblockchainrulesandisignored.Thedurationofthecreationofblocksiscontrolledbyamechanismcalled proof1Strictlyspeaking,itisnotnecessaryforallthenodestohaveafullcopyforBitcointoworkcorrectly.Iamsimplifyingatthecostofinaccuracies,hereaswellasinmostothertechnicaldes
43、criptions,inordertoconcentrateontheeconomicfactors.7ofwork andisbalancedtocreateanewblockapproximatelyevery10minutes.Thesenewlyproducedbitcoinssubsidisethemaintenanceoftheledger,asthecomputersthatmaintainitaretheonesthatreceivethisnewlyproducedbitcoins.Astheproductionratefallsovertime,anadditionalso
44、urceofrevenuefortheminersaretransactionfees,whichthesendersofthetransactionmayvoluntarilyspecify.Theminers,similarly,voluntarilychoosewhichtransactionstoincludeintheblock.Uponassemblingoftheblock,themineralsocollectthetransactionfeesofthetransactionsincludedintheblock.2.2Socioeconomice?ectsofBitcoin
45、AsisevidentfromthedescriptionofBitcoinsystemfromtheprevioussection,theBitcoinsystem,inthenarrowersense,ispurelyvirtual.Theaccountnumber(Bitcoinaddress),aswellasitsbalance,arefundamentallymerelynumbers,andthecontrolofthebalanceisachievedbyanothernumber.However,theconsistencyofthewholesystemisbasedonp
46、redeterminedruleswhichareeasytoverify(andfromapracticalpointofview,enforcedautomatically),andsharedacrossallthephysicalcomponentsoftheBitcoinnetwork,andalltheusersinteractingthroughBitcoin.TheusersofBitcoincanreasonablyexpectthatthesystemwillbehaveaccordingtothoserules.Userscanreasonablyexpectthatth
47、esupplyofBitcoinwillcontinueaccordingtoapredeterminedschedule,andthataslongastheykeeptheirprivatekeyssecret,they,andonlythey,cancontrolthebalanceoftheiraccount,andcandowithitwhatevertheywant,aslongastheactivityadherestothoserules.Therulesthemselvesarealsopurelyabstractandbasedonmathematics.Theyareob
48、livioustosocialconventions,irrespectiveoftheirnature.Whetherthesesocialconventionsareminorormajor,localorglobal,politicalorapolitical,ethicalorunethical,theusersofBitcoincanreasonablyexpectthatBitcoin(inthenarrowersense)willignorethem.Ononehand,thiscanhaveanenormousimpactonliberatingtheusersofBitcoi
49、nfromsocialnormstheydisagreewith.Ontheotherhand,italsoexposesthemtopotentialrisksassociatedwiththeabsenceofthesenorms.IfhowevertheusersaccepttheabstractruleofBitcoin,that theholderoftheprivatekeyhasexclusivecontrolofthecorrespondingbalance asasocialnorm(i.e., theholderoftheprivatekeyshouldhaveexclusivecontrolofthecorrespondingbalance ),thevastmajorityoftherisksassociatedwithsocialnormsvanish.Suchsocialnormshaveahighappealamonglibertarians.Averyclearstatementtothise?ectismadebySuede(2011a): Ina
