Abstract
This paper discusses the determinants of a Non-Fiat Anonymous Digital Payment Method’s (N-FAD) value and illustrates a relationship between N-FAD transactions, economic growth, and inflation. The relationship raises a heretofore unmentioned issue concerning the ability of monetary authorities to operate effectively, which justifies regulatory concerns over bitcoin and other N-FADs. Our method of analysis allows for empirical estimates that characterize the magnitude of the concern, as it relates to the use of bitcoin. Finally, we are able to identify the stylized features of bitcoin that complicate monetary policy, comment on how they relate to the value of N-FADs more generally, and provide suggestions for future research.
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Notes
Selgin (2015) categorized monies according to not only their intrinsic value, but also according to their scarcity being absolute or contingent on a decision maker, thus deriving four species of money. What the author denoted “synthetic commodity” money is what this paper refers to as non-fiat anonymous digital payment methods.
According to the Stamp Payments Act of 1862, “Whoever makes, issues, circulates, or pays out any note, check, memorandum, token, or other obligation for a less sum than $1, intended to circulate as money or to be received or used in lieu of lawful money of the United States, shall be fined under this title or imprisoned not more than six months, or both”. (Stamp Payments Act of 1862, 18 U.S.C. §336, , p. 98)
All transactions of bitcoin between virtual wallets are recorded in a public ledger. Therefore, the transactions are anonymous so long as users keep their wallet ID private. Since the fixed cost of creating a new wallet is essentially zero, many users who value the anonymity create a new wallet for every transaction.
Hypothetically, if a single entity were to control over half of the bitcoin network’s computing power, it could change the supply of bitcoin. However, the simulations run in Nakamoto (2008) showed the hypothetical situation to be a practical impossibility.
We thank an anonymous reviewer for pointing this out.
Taking the total differential of both sides of the equation of exchange yields: ΔMV + MΔV = ΔPQ + PΔQ. Assuming velocity is a unitary constant and dividing by M = PQ gives Eq. 1.
Of course nothing up to this point in the model has distinguished the N-FAD from the fiat currency. We have simply assumed two currencies in a single economy.
As of the writing of this paper, bitcoin’s market capitalization exploded to $110 billion while Ripple’s increased to $17 billion and a new currency, Ethereum has overtaken Ripple’s place behind bitcoin with a market capitalization of $20 billion.
Although the model assumes velocity is constant, the M2 measure of velocity did not change greatly over the time period and replacing it with the average value in the time frame does not alter the predictions substantially.
The trade data on Bitcoincharts (2018) is self-reported by the exchanges and so is not guaranteed to contain all currency trades. In particular, it will not include currency trades that occurred between private parties not using exchanges.
Badev and Chen (2015) may provide a better measure of bitcoin used to purchase goods and services as the authors measured how active wallets are a function of the period of time between transactions. One could potentially calculate a direct estimate of the number of times a bitcoin changes wallets for the purpose of a purchase verses the purpose of masking transactions. This would involve assumptions on what type of behavior is likely masking activity.
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Acknowledgements
Funding for this research was provided by the CSU Chancellors office through California State Polytechnic University. We would like to thank Gabriele Camera, Edmond Wu, and an anonymous reviewer for useful comments that improved this paper.
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Hunter, G.W., Kerr, C. Virtual Money Illusion and the Fundamental Value of Non-Fiat Anonymous Digital Payment Methods. Int Adv Econ Res 25, 151–164 (2019). https://doi.org/10.1007/s11294-019-09737-4
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DOI: https://doi.org/10.1007/s11294-019-09737-4