In contrast, an important advantage of BitCoin is the protection against inflation as a safe haven from government interference. Given that under the current mechanism the future number of BitCoins is capped to a maximum amount of 21 million units with no expansion possible beyond this amount, BitCoin will be exposed to deflationary pressures if its use as an investment alternative or for use as a medium of exchange increases.
Footnote 7 On the one hand, this is beneficial to BitCoin holders, as it will make them richer over time. On the other hand, the expectation of higher future value of BitCoins may lead to its hoarding in anticipation of higher price which in turn may reduce its use in exchanges of goods and services.
Meiklejohn et al. We may conclude that, in the absence of inflationary pressures, BitCoin popularity should increase compared to standard currencies, although deflationary pressure may act as a countervailing force Table 2. One of the main threats to BitCoin ability to preserve its value to the holders is the issue of cyber security. In the past, many BitCoin owners have lost their virtual money through online theft.
Standard currencies give a possibility to protect it against theft either by physically hiding it e. BitCoin is a virtual currency and thus it cannot be physically hidden. BitCoins must be held in computer accounts known as virtual wallets. The security of BitCoin wallets has often been a major problem. Even BitCoin exchanges were subject to cyber-attacks and thefts as they are common target of hackers. In the context of BitCoin use as a store of value, BitCoin sensitivity to cyber-attacks and thefts reduces trust in BitCoin as a currency and hence impedes its growth and chances of becoming a global currency Table 2.
Among all BitCoin features identified and discussed above, eventually, price volatility is the one with the largest differences compared to the major world currencies, such as US dollar, Euro, Yen, British Pound. One consequence of such extreme price volatility is that BitCoin may not succeed as a global currency to be accepted by suppliers and consumers, as it may fail to accurately convey relative prices of goods and services in the economy and may generate uncertainties to its holders due to its inability to preserve stable value over time.
Given that BitCoin is a relatively new currency, its price formation is not well understood yet. In order to better understand reasons for such extremely high price volatility, in this section we attempt to identify the drivers of BitCoin price and estimate their relative importance econometrically. The existing studies in the literature e. According to Buchholz et al. According to the quantity theory of money, the BitCoin supply is determined by the total stock of BitCoin in circulation.
The BitCoin demand is represented by the size of BitCoin economy i. The BitCoin velocity measures the frequency at which one unit of BitCoin is used for purchase of goods and services. The quantity theory implies that the price of BitCoin decreases with the velocity and the stock of BitCoins, but increases with the size of BitCoin economy and the general price level. The demand for BitCoin is primarily driven by its value as a medium of exchange.
BitCoin does not have intrinsic value like commodity currency such as gold standard. For example, the key difference between the gold standard and BitCoin is that the demand for BitCoin is driven solely by its value in future exchange, whereas the demand for commodity currency is driven by both its intrinsic value and its value in future exchange.
The BitCoin supply is given by the total stock of units put in circulation, which is publicly known and is fixed in the long-run. Whereas BitCoin supply is exogenous, the supply of gold is endogenous, as it responds to changes in production technology e. Given the exogeneity of BitCoin supply, the primary driver of its price developments is expected to be the demand side shocks.
By altering expectations of future use in exchanges, such shocks to demand have the potential to produce large swings in the BitCoin price Luther and White There are several BitCoin-specific factors which, in addition to traditional currency price determinants, such as market supply and demand, determine its demand. This is partially linked to the fact that BitCoin has been created relatively recently and to the nature of the currency.
Barber et al. First, BitCoin price may be affected by the risk and uncertainty of the whole BitCoin system. Given that BitCoin is a fiat currency and thus intrinsically worthless, it does not have an underlying value derived from consumption or its use in production process such as gold. The value of a fiat currency is based on trust that it will be valuable and accepted as a medium of exchange also in future Greco ; Kovenock and Vries Footnote 8 The expectations about trust and acceptance are particularly relevant for BitCoin which, being a relatively new currency, is in the phase of establishing its market share by building credibility among market participants.
Second, being a virtual currency, BitCoin is more vulnerable to cyber-attacks than traditional currencies, which can destabilize the whole BitCoin system and eventually lead to a collapse of BitCoin. Such attacks have been frequently occurring in the BitCoin system in the past Barber et al. Third, BitCoin price may be affected by its attractiveness as an investment opportunity for potential investors.
According to Gervais et al. The role of information is particularly important in the presence of many alternative investment choices and positive search costs. Given that investment demand depends on the costs associated with searching for information for potential investment opportunities available on the market, such as, the stock exchange, those investment opportunities which are under a particular attention of news media may be preferred by potential investors, because they reduce search costs.
In turn, increased investment demand for BitCoin may exercise upward pressure on BitCoin price. Indeed, Lee finds such evidence for BitCoin, whereby the alteration of positive and negative news generated high price cycles. This implies that the attention-driven investment behavior can affect BitCoin price either positively or negatively, depending on the type of news that dominate in the media at a given point of time.
Van Wijk stresses the role of global macroeconomic and financial development, captured by variables such as stock exchange indices, exchange rates, and oil prices measures in determining BitCoin price. The impact of macroeconomic and financial indicators on BitCoin price may work through several channels.
For example, stock exchange indices may reflect general macroeconomic and financial developments of the global economy. Favorable macroeconomic and financial developments may stimulate the use of BitCoin in trade and exchanges and thus strengthen its demand, which may have positive impact on BitCoin price.
Inflation and price indices are other type of indicators capturing important macroeconomic and financial developments. According to Krugman and Obstfeld and Palombizio and Morris , oil price is one of the main sources of demand and cost pressures, and it provides an early indication of inflation development.
Thus, when the price of oil signals potential changes in the general price level, this may lead to depreciation or appreciation of BitCoin price. Also the exchange rate may reflect inflation development and thus impact positively BitCoin price as indicated above. A decline in the stock prices induces foreign investors to sell the financial assets they hold. This leads to a depreciation of the underlying currency, but may stimulate BitCoin price, if investors substitute investment in stocks for investment in BitCoin.
Hence, in this case the stock exchange indices are expected to be positively related to BitCoin price. To account for the three drivers identified in the previous section, we specify the following BitCoin price equation:. US dollar per unit of BitCoin , p t is the general price level of goods and services in the economy e. The first four variables p t , y t , v t , and b t account for demand and supply drivers of BitCoin price driver 1.
Variable a t captures the BitCoin attractiveness driver 2. Finally, variable m t represents global macroeconomic and financial developments driver 3. The econometric model 1 contains mutually interdependent variables—BitCoin price and its explanatory variables. According to Engle and Granger , regressions of interdependent and non-stationary time series may lead to spurious results.
In order to avoid spurious regression, it is important to test the properties of the time series involved. Therefore, in the first step, the stationarity of time series is determined, for which we use two unit root tests: the augmented Dickey—Fuller ADF test and the Phillips—Perron PP test. If two individual time series are non-stationary, their combination may be stationary Engle and Granger In this special case, the time series are considered to be cointegrated, implying that there exists a long-run equilibrium relationship between them.
The number of cointegrating vectors is determined by the maximum eigenvalue test and the trace test. Both tests use eigenvalues to compute the associated test statistics. We follow the Pantula principle Pantula to determine whether a time trend and a constant term should be included in the model.
It includes an error correction term indicating the speed of adjustment of any disequilibrium towards a long-term equilibrium state. In other words, the error correction term captures the changes in the BitCoin price required to eliminate the past deviation of the prices from the equilibrium levels. As usual, in order to ensure the adequacy of the estimated models, we implement a series of specification tests: Lagrange-multiplier LM test for autocorrelation in the residuals; Jarque—Bera test to check if the residuals in the Vector-Error Correction VEC are normally distributed and a test of stability of the model.
We use the historical number of total BitCoins number of BitCoins which have been mined to account for the total stock of BitCoins in circulation, b t. We use two alternative proxies for the size of BitCoin economy, y t : the total number of unique BitCoin transactions per day number of transactions , and the number of unique BitCoin addresses used per day number of addresses.
Following Matonis , we proxy the monetary velocity of BitCoin circulation, v t , by BitCoin days destroyed for any given transaction days destroyed. This variable is calculated by taking the number of BitCoins in transaction and multiplying it by the number of days since those coins were last spent. All these data are extracted from quandl. To measure the price level of global economy, p t , we use exchange rate between the US dollar and the Euro exchange rate extracted from the European Central Bank.
For example, if the US dollar would appreciate against the Euro, most likely it will also appreciate against the BitCoin. Consequently, an increase in the exchange rate between the Euro and the US dollar would lead to a decrease in the amount of US dollar that have to be paid for one BitCoin, which decreases its price. In order to capture BitCoin attractiveness, a t , we follow Kristoufek and use the volume of daily BitCoin views on Wikipedia views on Wikipedia.
In addition, we also construct a variable capturing the number of new members new members and new posts on online BitCoin forums new posts extracted from bitcointalk. As explained above, the variable new members captures the size of the BitCoin economy but also attention-driven investment behavior of new BitCoin members. To account for global macroeconomic and financial developments, m t , we follow van Wijk and use oil price oil price and the Dow Jones stock market index Dow Jones.
Following the drivers of BitCoin price formation identified in Sect. The differences in the specifications between the estimated models are summarized in Table 3. Models 1. Model 2. Model 3. Models 4. The estimation results are reported in Tables 4 , 5 , 6 and 7. Tables 4 and 5 report the short-run impact of different determinants on BitCoin price. The short-run effects represent short-run dynamics of variables in the cointegrated system. They describe how the time series react when the long-run equilibrium is distorted.
According to the results reported in Tables 4 and 5 , a number of variables have statistically significant short-run effect on BitCoin price adjustments. In particular, this is the case for own price effects, the stock of total BitCoins number of BitCoins BitCoin days destroyed days destroyed and Wikipedia views views on Wikipedia.
Tables 6 and 7 show the long-run impacts of different determinants on BitCoin price. According to the results reported in Tables 5 and 6 , the long-run relationship between BitCoin price and the explanatory variables considered in the estimated models is stronger than the short-run impact. In the following we discuss the long-run results with respect to the three drivers of BitCoin price formation. The first major observation arising from the estimates reported in Tables 6 and 7 is that the market forces of supply and demand have an impact on BitCoin price.
Generally, the demand side variables e. According to the results reported in Table 6 , an increase in the stock of BitCoins number of BitCoins leads to a decrease in BitCoin price model 1. These results are in line with our expectations.
Contrary to our expectations, the alternative variable that captures the size of the BitCoin economy number of transactions has negative impact on BitCoin price in models 1. However, this variable is not significant in the more general models models 4. Although, the sign of the estimated coefficients for market forces of BitCoin supply and demand is in line with our hypothesis except for the variable number of transactions in models 1.
The supply—demand variables are statistically significant in models 4. This could be explained by the fact that part of the BitCoin price variation explained by the supply—demand variables is absorbed by other variables in more general specifications models 4.
The strongest and statistically the most significant impact on BitCoin price is estimated for variables capturing the impact of BitCoin attractiveness: views on Wikipedia , new members and new posts models 2. Variable new members has negative impact on BitCoin price, implying that attention-driven investment behavior of new investors dominates. Variable new posts has positive impact on BitCoin price, reflecting an increasing acceptance and trust in BitCoin captured by the intensity of discussion between BitCoin users.
This may reflect declining transaction costs and uncertainty for investors, which increases investment demand for BitCoin and hence its price. Consistent with the findings of Kristoufek , Wikipedia views have a statistically significant impact on BitCoin price. This variable is significant and has positive impact in all models except for model 4. These results are in line with our expectations and with the remarkable Wikipedia article traffic statistics, according to which on average BitCoin article on Wikipedia is being viewed , times per month, and is ranked among the top most viewed articles.
Only 88 English-language Wikipedia articles have more traffic than the BitCoin article, out of a total of approximately 5 million English-language articles. However, the interpretation of Wikipedia views is not straightforward, as it may capture various effects. The attention effect may impact either positively or negatively the BitCoin price depending on the type of news. The positive estimated coefficient associated with Wikipedia views variable implies that the impact of positive news dominates.
One of the most common negative news reported in media about BitCoin is related the security breach cyber-attacks against the currency. The positive estimated results indicate that the implication of security problem appears to be offset by the positive news effect. This argument is also in line with the sceptics on BitCoin e. Velde ; Hanley ; Yermack who argue that hoarding is one of the key weaknesses of BitCoin as a currency alongside the security problem compared to standard currencies.
Our findings suggest that, in contrast to previous studies i. Only in Model 3. Our results suggest that an increase in oil price leads to a decrease in the budget of consumers and companies , implying that less money will be spent on other goods, including BitCoin. Consequently, this would lead to a decrease in demand for BitCoin, decreasing its price. These results are in line with the estimates of van Wijk , who also finds statistically significant impact of macro-financial variables on BitCoin price.
However, van Wijk does not account for market forces of supply and demand or BitCoin attractiveness indicators. When these factors are taken into consideration models 4. These finding support the argument of Yermack that BitCoin is relatively ineffective as a tool for risk management against adverse market developments as its price is not responsive to macroeconomic variables meaning that it cannot be easily hedged against other assets that are driven by macroeconomic developments. The verification of our results through comparison with previous studies is a challenging task, as 1 the currency is relatively new and there are not many studies in the literature, which analyze BitCoin price formation; and 2 there are important differences between the used empirical proxies for variable construction and model specification across different studies.
Despite these difficulties, in this section we attempt to compare our results with those reported in the literature. Generally, the study of Bouoiyour and Selmi seems to be the most comparable study to ours in terms of the employed estimation techniques, underlying data and explanatory variables. Similarly to our paper, they control for all three sets of drivers: market forces, attractiveness indicators and macro variables. Other studies are less comparable to our approach mainly due to differences in model specification, as most of them study the impact of each BitCoin price driver separately; they do not consider interactions between them.
For example, Kristoufek considers only BitCoin attractiveness indicators, whereas Van Wijk includes only the macroeconomic drivers. The impacts of BitCoin supply and demand driver 1 on BitCoin price are measured by the ratio of exchange and trade transactions and velocity as the frequency at which one unit of BitCoin is used to purchase goods in Bouoiyour and Selmi According to Bouoiyour and Selmi , the estimated short-run impact of transactions on BitCoin price is positive and statistically significant 0.
These differences may be caused by the fact that Bouoiyour and Selmi proxy for transactions using the ratio of exchange and trade transactions, whereas our proxy for transaction variable is directly constructed from the number of BitCoin transactions. Note also that our short-run estimates are not statistically different from zero. Surprisingly, the long-run impact of transactions is considerably lower by one order of magnitude than the short-run impact.
Given that our specification is more general, we use longer time series and our results are more significant, a negative long-run relationship between the number of transactions and BitCoin price is more likely. According to Bouoiyour and Selmi , the estimated short-run impact of BitCoin velocity is positive and considerably higher 2.
Note, however, that the coefficient of Bouoiyour and Selmi is not statistically significant, whereas it is statistically significant for all estimated models with one and two lags in our results. Again, these differences may be explained by differences in the velocity variable construction and model specifications.
Whereas Bouoiyour and Selmi calculate velocity as the frequency at which one unit of BitCoin is used to purchase goods, we measure velocity by the number of days needed until a BitCoin is destroyed. The estimated long-run impact of transactions is positive in Bouoiyour and Selmi as well 0. However, it is not statistically significant. As in the case of transactions, the long-run impact of velocity is considerably lower by three orders of magnitude than the short-run impact in Bouoiyour and Selmi.
In contrast, our estimates suggest that the long-run effect of velocity is positive and considerably higher by two orders of magnitude 5. Given that our specification is more general, we use longer time series and our results are more significant, a positive long-run relationship between velocity and BitCoin price is more likely.
Hence, their results are not directly comparable to our estimates. They find that an increasing price volatility leads to higher BitCoin price. Moreover, the results are different between the two analyzed periods August —June vs.
June —March : in the first period the volatility led to a demand for BitCoins, and after the bubble burst in June the novelty of BitCoin decreased, only market participants who were averse to volatility stayed in the market, leading to no effect of volatility on BitCoin price in the second period.
However, as above, their proxy for market demand—price volatility—is very different from our proxy—number of transactions—and hence cannot be directly compared with our estimates. Moreover, Buchholz et al. The estimated short-run impact of searches in Google is positive and sizeable in Bouoiyour and Selmi , when compared to our negative and considerably smaller estimates.
These differences could be explained by differences in variable construction and model specifications. The estimated long-run impact of searches in Google is positive and smaller than the short-run estimates 0.
Again, our long-run estimates 1. Kristoufek studies the impact of BitCoin attractiveness on its price by using BitCoin searches in Google and Wikipedia views. He finds that the increased interest in BitCoin measured by BitCoin searches in Google increases its price. As the interest in BitCoin increases, the demand increases as well causing the prices to increase.
The estimated positive impact is in line with our results. The relationship between Wikipedia views and BitCoin turns out to be statistically not significant in Kristoufek In contrast, our long-run results suggest a positive and statistically significant impact of Wikipedia views on BitCoin price 1. The statistically significant results of Kristoufek may be caused by the fact that his analysis is based on a rather short period 2 years compared to a 5.
Note that Kristoufek finds that the relationship is positive and statistically significant in the opposite direction. The estimated coefficient is 0. Also Buchholz et al. However, they estimate the relationship between Google hits and the number of BitCoin transactions, not BitCoin price. The impact of global macroeconomic and financial developments driver 3 on BitCoin price is measured by output volume, gold price and Chinese market index in Bouoiyour and Selmi According to Bouoiyour and Selmi , output volume and Chinese market index have positive and statistically significant impact on BitCoin price 0.
However, our estimates are not significantly different from zero. Both the sign and the magnitude of the estimated long-run coefficients on the output volume and Chinese market index are rather similar to short-run estimates 0. However, none of the long-run global macroeconomic and financial development coefficients is statistically significant in Bouoiyour and Selmi In contrast, both our global macroeconomic and financial development coefficients have a statistically significant impact on BitCoin price in the long-run.
Whereas the impact of the Dow Jones index is positive Note that signs of our long-run estimates are the same as those of Bouoiyour and Selmi : Dow Jones index and Chinese market index have positive impact, whereas gold price and oil price have negative impact on BitCoin price.
Given that our long-run estimates are statistically significant but those of Bouoiyour and Selmi are not, our estimates can be considered as more reliable. The positive and statistically significant coefficient is in line with our results for models 3. The results of van Wijk suggest that, if the US dollar appreciates against Euro, it is most likely to be the case that it also appreciates against the BitCoin.
Consequently, an increase in the Euro—US dollar exchange rate leads to a decrease in the amount of US dollar that have to be paid for one BitCoin, which decreases its value. In contrast, our estimates suggest a positive relationship between the Euro—US dollar exchange rate and BitCoin price.
However, none of our estimated models is statistically significant 1. Given that the estimates of van Wijk are statistically significant and plausible from an economic theory point of view, likely they are more reliable. As explained above, differences between the estimates may be caused by the fact that the times series of van Wijk are only half as long as ours, not capturing the extreme price changes in and , as well as they do not control for other important BitCoin price drivers.
Currency, or money in general, is typically defined as having three main functions: a medium of exchange, a unit of account, and a store of value. The present paper attempts to analyze BitCoin features, which may facilitate to become a global currency, as well as characteristics, which may impede the use of BitCoin as a medium of exchange, a unit of account, and a store of value.
The first function of any currency is to intermediate the exchange of goods and services. Being not a legal tender, BitCoin is fully dependent on voluntary adoption by market participants as a medium of exchange. BitCoin primary advantage relative to standard currencies for its use in exchanges is lower costs of transfers as there are minimal costs linked to third-party intermediaries. Although, BitCoin has shown a phenomenal growth during the last years, it still has a negligible market presence globally as a medium of exchange.
Moreover, evidence tends to support the view that many of BitCoin transactions involve transfers between speculative investors and are not used in exchanges of goods and services. The second function of a currency is to serve the function of a unit of account by being able to convey the relative value of goods and services in the economy.
The major concern of BitCoin is its high price volatility which may reduce its power to fulfill this function accurately. However, entrepreneurial innovations such as market exchange pricing and instantaneous exchange facilities may remedy this problem but not fully eliminate it. Further, nearly-infinite sub-divisibility is a great advantage of BitCoin relative to standard currencies, though in some instances it may pose confusion among consumers given that the price quotation differentiated in the magnitude of several decimal places may be undistinguishable for them.
The third function of a currency is to serve as a store of value over time. Standard currencies are usually inflationary, while BitCoin is associated with deflationary pressures, if it becomes widely used. While this is beneficial to BitCoin holders, the expectation of higher future value of BitCoin may lead to its hoarding, which may reduce its use in exchanges of goods and services.
One of the main threats to BitCoin ability to preserve the value to its holders is the security problem linked to cyber-attacks given that BitCoin is a virtual currency, its system is fully internet based and has no oversight institution entrusted to protect the system. The identified BitCoin features are compared with traditional currencies and their possible impact on BitCoin functions as a currency.
We identify several features of BitCoin as a medium of exchange, which differ substantially from traditional currencies: legal tender, fixed costs, network externalities, transaction costs, dispute resolution, credit market, anonymity and transparency. We also find two key characteristics of BitCoin as a unit of account, which differ substantially from traditional currencies: price volatility and divisibility.
Finally, we identify two features of BitCoin as store of value, which differ substantially from traditional currencies: non-inflationary supply and cyber security. Among all BitCoin features identified and analyzed in this paper, eventually, price volatility is the one with the largest differences compared to standard currencies, such as US dollar, Euro, Yen, British Pound.
Large price movements alter the purchasing power causing risk and costs to firms and consumers. Given that BitCoin is a relatively new currency, its price formation is not well understood yet, as there are only few studies on BitCoin price formation available in the literature. In order to better understand reasons for such extremely high price volatility, in the second part of the paper we attempt to identify drivers of BitCoin price and estimate their importance econometrically.
The previous literature suggests three types of drivers determining BitCoin price development: 1 market forces of BitCoin supply and demand, 2 BitCoin attractiveness, and 3 global macroeconomic and financial developments. Our empirical results confirm that market forces of BitCoin supply and demand have an impact on BitCoin price, implying that, to a certain extent, the formation of BitCoin price can be explained in a standard economic model of currency price formation.
In particular, the demand-side drivers, such as the size of the BitCoin economy and the velocity of BitCoin circulation, were found to impact BitCoin price. Given that BitCoin supply is exogenous, likely, the development of the demand side drivers will be among the key determinants of BitCoin price also in the future potentially lading to deflationary pressures if BitCoin use expands.
However, the impact of demand-side drivers on the BitCoin price somehow reduces when controlling for BitCoin attractiveness, which implies that these drivers appear to be relatively more important. In fact, we cannot reject the hypothesis extensively emphasized in the literature that investor speculations are also affecting BitCoin price. The statistically significant impact of Wikipedia views on BitCoin price could be an indicator of speculative short-run behavior of investors, or it may capture the expansion of the demand as a medium of exchange of the BitCoin.
Additionally, we find that also new information impact BitCoin price positively, which may be a result of an increased trust among users. As such, speculative trading of BitCoins is not necessarily an undesirable activity, as it may generate benefits in terms of absorbing excess risk from risk averse participants and providing liquidity on the BitCoin market.
A negative side of the short-run speculative investment is that it may increase price volatility and create price bubbles which has adverse implication for BitCoin users. A further negative side of the long-run speculative investment is more extensive hoarding of BitCoins which may reduce its use in exchanges.
The success of BitCoin thus also hitches on its ability to reduce the potential negative implications of such speculations and expand the use of BitCoin in trade and commerce. Finally, our econometric estimates do not support previous findings that the global macro-financial development may be driving BitCoin price. Because macroeconomic changes are not reflected in BitCoin price movements its price volatility cannot be easily hedged.
This is in contrast to standard currencies which are heavily driven by macro developments and hedging option is available and widely used. In summary, our study has shown that there is a disagreement in the literature on whether BitCoin can become a global currency. Overall, negative assessments about BitCoin as a currency tend to prevail given that several BitCoin characteristics identified in the paper impede its use as a currency and thus constrain its expansion globally.
However, as outlined in the paper some BitCoin characteristics give its predisposition to be adopted at least in some segment of money market if not in a wider context. In particular, BitCoin may have a high relative comparative advantage with respect to standard currencies in countries with unstable financial system e.
In addition, BitCoin may represent a cost-effective remittance system in developing countries, were traditional transfers are very expensive and the banking system is underdeveloped and unsecure. Given that BitCoin transfers can be done with relatively minimal cost and resource requirements and are independent of geographical location or banking system in place, they are ideally positioned to serve as an efficient international remittance system.
Footnote The BitCoin technology—BlockChain Footnote 11 —opens up several other possibilities and technological innovations, including micropayments, crowdfunding, distributed exchanges, smart property, property registry, ticketing and secure voting systems. For example, BlockChain technology could provide a way to track the unique history of individual devices, by recording a ledger of data exchanges between it and other devices, web services, and human users. Similarly, BlockChain could enable smart devices to become independent agents, autonomously conducting a variety of transactions.
For example, a vending machine could not only monitor and report its own stock, but also solicit bids from distributors and pay for the delivery of new items automatically—based on the purchase history of its customers. Further, the disruptive innovation of BitCoin provides the potential to give citizens direct control over their financial activities by removing costly—and sometimes obscure—intermediation layers fostering financial inclusion.
Note that virtual currencies must be distinguished from electronic money. The key distinguishing feature of electronic money is that their link with traditional money is preserved and have the same unit of account as well as they have legal foundation and are regulated. Given that newly issued BitCoins decrease over time, miners will have to rely more on transaction fees to recoup their investment in mining which may lead to higher transaction fees in the future EBA For a theoretical analysis of the economics of BitCoin transaction fees see Kroll et al.
Access to the BitCoin network requires downloading a BitCoin software on personal computer and joining the BitCoin network, which allows users to engage in operations, and update and verify transactions. A related problem pointed by Yermack is linked to relatively high diversity of BitCoin prices across different exchanges and web quotations at any given time. This variation in prices poses problem to establish a valid reference point for price setting for both consumers and businesses.
Moreover, BitCoins which were accidentally lost or destroyed can never be replaced, resulting in shrinkage of the money base and leading to enhanced deflationary trend. Given that people consider a currency valuable if they expect others to do so, for a decentralized currency, such as BitCoin, trust depends on a belief that the rules of the currency will be stable over time. An example of the BitCoin based system for remittance transfers is BitPesa. BitPesa is an online payment platform that uses BitCoin to offer money transfers to and from East Africa Folkinshteyn et al.
Barber BM, Odean T All that glitters: the effect of attention and news on the buying behavior of individual and institutional investors. Rev Financ Stud 21 2 — Article Google Scholar. In: Keromytis AD ed Financial cryptography and data security. Springer, Berlin. Berentsten A Monetary policy implications of digital money.
Bitcoin Protect your privacy. Accessed 27 June Bitcoin W Category: gambling. Accessed 7 June Bitcoinhelp Using Bitcoin anonymously. BlockChain Number of transactions per day. July J Econ Perspect 29 2 — Ann Econ Finance 16, Forthcoming. Brito J, Castillo A Bitcoin: a primer for policymakers. Google Scholar. Bryans D Bitcoin and money laundering: mining for an effective solution.
Indiana Law J — Economics CoinDesk a. What can you buy with BitCoins? CoinDesk 17 February CoinDesk b What is Bitcoin? Follow Bloomberg Pursuits. View More Pursuits. Sarah Green Carmichael Return to the Office? Follow Bloomberg Opinion. Try Finnish. Follow Bloomberg Businessweek.
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