《Bits and Bets》.pdfVIP

Bits and Bets Information, Price Volatility, and Demand for Bitcoin Martis Buchholz, Jess Delaney, and Joseph Warren Jeff Parker Economics 312 Spring 2012 2 I. Introduction Bitcoin is an online, digital currency, operating on a peer-to-peer network. The goal of the system is to establish a viable private currency without the need for a third party guarantor of transactions. Because bitcoins exist as digital data, this leads to what is known as the “double-spending problem,” how can the system disallow individuals from copying the currency in their possession and using it multiple times? Bitcoin solves this problem by publicly recording transactions on “block chains” that cannot be undone. The records on block chains are created by CPU power given to the network by users, who receive a small number of bitcoins in return (Nakamoto 2008). As transactions become more frequent over time, bitcoin users donating CPU power, or “miners” as they are colloquially know, receive a diminishing number of bitcoins in return for each block recorded. Thus the total supply of bitcoins is increasing over time at a diminishing rate (as can be seen in Figure 1). Bitcoin was born in the midst of the financial crisis of 2008-2009, and its ethos is aligned with much of the political sentiment most prominent in that period. When Nakamoto’s paper came out in 2008, trust in the ability of governments and banks to manage the economy and the money supply was at its nadir. … Bitcoin required no faith in the politicians or financiers who had wrecked the eco