Can We Stabilize the Price of a Cryptocurrency?: Understanding the Design of Bitcoin and Its Potential to Compete with Central Bank Money

Iwamura, Mitsuru; Kitamura, Yukinobu; Matsumoto, Tsutomu; Saito, Kenji

doi:10.2139/ssrn.2519367

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Can We Stabilize the Price of a Cryptocurrency?: Understanding the Design of Bitcoin and Its Potential to Compete with Central Bank Money

39 Pages Posted: 6 Nov 2014

Mitsuru Iwamura

Waseda University - Graduate School of Commerce

Yukinobu Kitamura

Hitotsubashi University - Institute of Economic Research

Tsutomu Matsumoto

Yokohama National University, Faculty of Environment and Information Sciences

Kenji Saito

Keio Research Institute at SFC, Keio University

Date Written: October 25, 2014

Abstract

This paper discusses the potential and limitations of Bitcoin as a digital currency. Bitcoin as a digital asset has been extensively discussed from the viewpoints of engineering and security design. But there are few economic analyses of Bitcoin as a currency. Bitcoin was designed as a payments vehicle and as a store of value (or speculation). It has no use bar as money or currency. Despite recent enthusiasm for Bitcoin, it seems very unlikely that currencies provided by central banks are at risk of being replaced, primarily because of the market price instability of Bitcoin (i.e. the exchange rate against the major currencies). We diagnose the instability of market price of Bitcoin as being a symptom of the lack of flexibility in the Bitcoin supply schedule - a predetermined algorithm in which the proof of work is the major driving force. This paper explores the problem of instability from the viewpoint of economics and suggests a new monetary policy rule (i.e. monetary policy without a central bank) for stabilizing the values of Bitcoin and other cryptocurrencies.

Keywords: Bitcoin, Cryptocurrency, Currency competition, Friedrich A. Hayek, Proof of work.

JEL Classification: B31, E42, E51

Suggested Citation: Suggested Citation

Iwamura, Mitsuru and Kitamura, Yukinobu and Matsumoto, Tsutomu and Saito, Kenji, Can We Stabilize the Price of a Cryptocurrency?: Understanding the Design of Bitcoin and Its Potential to Compete with Central Bank Money (October 25, 2014). Available at SSRN: https://ssrn.com/abstract=2519367 or http://dx.doi.org/10.2139/ssrn.2519367