Economics of bitcoin

Bitcoin is a designed by its inventor, Satoshi Nakamoto, to work as a currency.



Bitcoin is a digital asset It is commonly referred to with terms like: digital currency, , virtual currency, , digital gold, or cryptocurrency. Bitcoins have three useful qualities in a currency, according to The Economist in January 2015: they are “hard to earn, limited in supply and easy to verify”. Economists define money as a , a , and a and agree that bitcoin has some way to go to meet all these criteria.

Classification of bitcoin by the United States government is to date unclear with multiple conflicting rulings. In 2013 Judge of the stated that “Bitcoin is a currency or form of money”. In July 2016, Judge Teresa Mary Pooler of cleared Michell Espinoza in State of Florida v. Espinoza in money-laundering charges he faced involving his use of bitcoin. Judge Pooler stated “Bitcoin may have some attributes in common with what we commonly refer to as money, but differ in many important aspects, they are certainly not tangible wealth and cannot be hidden under a mattress like cash and gold bars.” In September 2016, a ruling by Judge of contradicted the Florida Espinoza ruling stating “Bitcoins are funds within the plain meaning of that term.— Bitcoins can be accepted as a payment for goods and services or bought directly from an exchange with a bank account. They therefore function as pecuniary resources and are used as a medium of exchange and a means of payment.”

The categorizes bitcoin as a decentralized virtual currency. The classifies bitcoin as a , and the classifies it as an asset. while others call bitcoin real money. declared it a commodity in December 2013. A journalist referred to it as digital collectible. Two computer scientists proposed the term “money-like informational commodity”. In a 2016 Forbes article, bitcoin was characterized as a member of a new asset class.

The has stated that bitcoin “is fundamentally not a currency but an investment target”.

In addition to the above, bitcoin is also characterized as a payment system.

Buying and selling

Bitcoins can be bought and sold both on- and offline. Participants in online offer bitcoin . Using an online exchange to obtain bitcoins entails some risk, and, according to a study published in April 2013, 45% of exchanges fail and take client bitcoins with them. Exchanges have since implemented measures to provide proof of reserves in an effort to convey transparency to users. Offline, bitcoins may be purchased directly from an individual or at a bitcoin ATM. Bitcoin machines are not however traditional ATMs. Bitcoin kiosks are machines connected to the Internet, allowing the insertion of cash in exchange for bitcoins. Bitcoin kiosks do not connect to a bank and may also charge transaction fees as high as 7% and exchange rates US$50 over rates from elsewhere.

As of 2016 it was estimated there were over 800 bitcoin ATMs operating globally, the majority (500+) being in the United States.

Price and volatility

Attempting to explain the high volatility, a group of Japanese scholars stated that there is no stabilization mechanism. The Bitcoin Foundation contends that high volatility is due to insufficient , while a Forbes journalist claims that it is related to the uncertainty of its long-term , and the high volatility of a startup currency makes sense, “because people are still experimenting with the currency to figure out how useful it is.” As of 2014, pro-bitcoin venture capitalists argued that the greatly increased trading volume that planned exchanges would generate is needed to decrease price volatility. In 2011, the value of one bitcoin rapidly rose from about US$0.30 to US$32 before returning to US$2. In the latter half of 2012 and during the , the bitcoin price began to rise, reaching a high of US$266 on 10 April 2013, before crashing to around US$50. On 29 November 2013, the cost of one bitcoin rose to the all-time peak of US$1,242. In 2014, the price fell sharply, and as of April remained depressed at little more than half 2013 prices. it was under US$600. In January 2015, noting that the bitcoin price had dropped to its lowest level since spring 2013 – around US$224 – suggested that “[w]ith no signs of a rally in the offing, the industry is bracing for the effects of a prolonged decline in prices. In particular, bitcoin mining companies, which are essential to the currency’s underlying technology, are flashing warning signs.” Also in January 2015, reported that drug dealers were “freaking out” as they lost profits through being unable to convert bitcoin revenue to cash quickly enough as the price declined – and that there was a danger that dealers selling reserves to stay in business might force the bitcoin price down further.

On 4 November 2015, bitcoin had risen by more than 20%, exceeding $490. The associated the rapid growth with the popularity of “socio-financial networks” MMM operated by Russian businessman Sergei Mavrodi.

According to The Wall Street Journal, , bitcoin is starting to look slightly more stable than gold. On 3 March 2017, the price of a bitcoin has surpassed the value of for the first time and its price surged to an all-time high. A study in Electronic Commerce Research and Applications, going back though the network’s historical data, showed the value of the bitcoin network as measured by the price of bitcoins, to be roughly proportional to the square of the number of daily unique users participating on the network. This is a form of and suggests that the network was demonstrating network effects proportional to its level of user adoption.

Speculative bubble dispute

Bitcoin has been labelled a by many including former and economist . laureate said that bitcoin “exhibited many of the characteristics of a speculative bubble”. On 14 March 2014, the American business magnate said, “Stay away from it. It’s a mirage, basically.” Two lead software developers of bitcoin, Gavin Andresen and Mike Hearn, have warned that bubbles may occur. David Andolfatto, a vice president at the , stated, “Is bitcoin a bubble? Yes, if bubble is defined as a liquidity premium.” According to Andolfatto, the price of bitcoin “consists purely of a bubble,” but he concedes that many assets have prices that are greater than their intrinsic value. by hedge fund manager Ken Griffin of Citadel, and by former president of the Dutch Central Bank, Nout Wellink. In 2013, Wellink remarked, “This is worse than the tulip mania […] At least then you got a tulip [at the end], now you get nothing.” On 13 September 2017, compared bitcoin to a bubble, saying it was only useful for drug dealers and countries like North Korea. On 22 September 2017, a hedge fund named Blockswater subsequently accused JP Morgan of market manipulation and filed a market abuse complaint with .

Journalist Matthew Boesler rejects the speculative bubble label and sees bitcoin’s quick rise in price as nothing more than normal economic forces at work. The Washington Post pointed out that the observed cycles of appreciation and depreciation don’t correspond to the definition of speculative bubble. economists, and the central bank of Estonia have voiced concerns that bitcoin is a . In 2013, , a law professor at the University of Chicago, stated that “a real Ponzi scheme takes fraud; bitcoin, by contrast, seems more like a collective delusion.” In 2014 reports by both the and the Swiss examined the concerns and came to the conclusion that bitcoin is not a Ponzi scheme. In 2017 billionaire referred to bitcoin as a pyramid scheme.

On 12 September 2017, , CEO of , called bitcoin a “fraud” and said he would fire anyone in his firm caught trading it. claimed that the same day Dimon made his statement, JP Morgan also purchased a large amount of bitcoins for its clients.

Value forecasts

Financial journalists and analysts, economists, and investors have attempted to predict the possible future value of bitcoin. In April 2013, economist stated, “bitcoins will attain their true value of zero sooner or later, but it is impossible to say when”.

In December 2013, finance professor Mark T. Williams forecast that bitcoin would trade for less than $10 by mid-year 2014. In the indicated period bitcoin has exchanged as low as $344 (April 2014) and during July 2014 the bitcoin low was $609. In December 2014, Williams said, “The probability of success is low, but if it does hit, the reward will be very large.”

In November 2014, David Yermack, Professor of Finance at New York University Stern School of Business, forecast that in November 2015 bitcoin may be all but worthless. In the indicated period bitcoin has exchanged as low as $176.50 (January 2015) and during November 2015 the bitcoin low was $309.90. Bitcoin investor Cameron Winklevoss stated in December 2013 that the “small bull case scenario for bitcoin is… 40,000 USD a coin”.


The “death” of bitcoin has been proclaimed numerous times.

magazine declared bitcoin “dead” in June 2011, followed by Gizmodo Australia in August 2011. magazine wrote it had “expired” in December 2012. Ouishare Magazine declared, “game over, bitcoin” in May 2013, and New York Magazine stated bitcoin was “on its path to grave” in June 2013. Reuters published an “obituary” for bitcoin in January 2014. Street Insider declared bitcoin “dead” in February 2014, followed by The Weekly Standard in March 2014, Salon in March 2014, Vice News in March 2014, and Financial Times in September 2014. In January 2015, USA Today stated bitcoin was “headed to the ash heap”, and The Telegraph declared “the end of bitcoin experiment”. In January 2016, former bitcoin developer Mike Hearn called bitcoin a “failed project”.

Peter Greenhill, Director of E-Business Development for the Isle of Man, commenting on the obituaries paraphrased saying “reports of bitcoin’s death have been greatly exaggerated”.


Some have responded positively to bitcoin while others have expressed skepticism. François R. Velde, Senior Economist at the , described it as “an elegant solution to the problem of creating a digital currency”. and have found fault with bitcoin, questioning why it should act as a reasonably stable or whether there is a floor on its value. Economist has criticized bitcoin as “the final refutation of the “.

activist has criticized the lack of anonymity and called for reformed development. PayPal President calls bitcoin a “great place to put assets” but claims it will not be a currency until price volatility is reduced. , in relation to the cost of moving money from place to place in an interview for Bloomberg L.P. stated: “Bitcoin is exciting because it shows how cheap it can be.”

Officials in countries such as , the , , the , and the have recognized its ability to provide legitimate financial services. Recent bitcoin developments have been drawing the interest of more financially savvy politicians and legislators as a result of bitcoin’s capability to eradicate fraud, simplify transactions, and provide transparency, when bitcoins are properly utilized.

Acceptance by merchants

In 2015, the number of merchants accepting bitcoin exceeded 100,000. Instead of 23% typically imposed by processors, merchants accepting bitcoins often pay fees in the range from 0% to less than 2%. select firms that accept payments in bitcoin include:

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Acceptance by nonprofits

Bitcoin is accepted by

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Some U.S. political candidates, including New York City Democratic Congressional candidate have said they would accept campaign donations in bitcoin. In late 2013 the became the first university in the world to accept bitcoins and also began offering a degree program on the study of digital currencies.

Healthcare providers

, My Doctor Medical Group and RapidMed Urgent Care Center in Lewisville, Texas, had adopted bitcoin.

Payment service providers

Merchants accepting bitcoin, such as Dish Network, use the services of bitcoin payment service providers such as or Coinbase. When a customer pays in bitcoin, the payment service provider accepts the bitcoin on behalf of the merchant, directly converts it, and sends the obtained amount to merchant’s bank account, charging a fee of less than 1 percent for the service.

Use in retail transactions

Due to the design of bitcoin, all retail figures are only estimates. MIT Technology review estimates that, , fewer than 5,000 bitcoins per day (worth roughly $1.2 million at the time) were being used for retail transactions, and concludes that in 2014 “it appears there has been very little if any increase in retail purchases using bitcoin.” According to Antonio Gallippi, a co-founder of , “banks are scared to deal with bitcoin companies, even if they really want to”. In 2014, the closed accounts of businesses with ties to bitcoin, and refused to serve a hedge fund with links to bitcoin. Australian banks in general have been reported as closing down bank accounts of operators of businesses involving the currency; this has become the subject of an investigation by the .

In a 2013 report, Bank of America Merrill Lynch stated that “we believe bitcoin can become a major means of payment for e-commerce and may emerge as a serious competitor to traditional money-transfer providers.”

In June 2014, the first bank that converts deposits in currencies instantly to bitcoin without any fees was opened in Boston.

As an investment

Some Argentinians have bought bitcoins to protect their savings against high inflation or the possibility that governments could confiscate savings accounts. During the , bitcoin purchases in Cyprus rose due to fears that savings accounts would be confiscated or taxed.

Other methods of investment are bitcoin funds. The first regulated bitcoin fund was established in Jersey in July 2014 and approved by the Jersey Financial Services Commission. Also, c. 2012 an attempt was made by the Winklevoss twins (who in April 2013 claimed they owned nearly 1% of all bitcoins in existence) to establish a bitcoin . As of 10 March 2017 the bitcoin ETF was declined by the SEC because of regulatory concerns. The price fell 15% in a few minutes, but soon mostly recovered. As of early 2015, they have announced plans to launch a New York-based bitcoin exchange named Gemini, which has received approval to launch on 5 October 2015. On 4 May 2015, Bitcoin Investment Trust started trading on the OTCQX market as GBTC. Forbes started publishing arguments in favor of investing in December 2015. In 2013 and 2014, the and the (FINRA), a United States , warned that investing in bitcoins carries significant risks. Forbes named bitcoin the best investment of 2013. In 2014, Bloomberg named bitcoin one of its worst investments of the year. In 2015, bitcoin topped Bloomberg’s currency tables.

To improve access to price information and increase transparency, on 30 April 2014 announced plans to list prices from bitcoin companies and Coinbase on its 320,000 subscription financial data terminals. In May 2015, Intercontinental Exchange Inc., parent company of the , announced a bitcoin index initially based on data from Coinbase transactions.

According to , in 2013 there were about 250 bitcoin wallets with more than $1 million worth of bitcoins. The number of bitcoin millionaires is uncertain as people can have more than one wallet.

Venture capital

, such as Peter Thiel‘s , which invested million in , do not purchase bitcoins themselves, instead funding bitcoin infrastructure like companies that provide payment systems to merchants, exchanges, wallet services, etc. In 2012, an incubator for bitcoin-focused start-ups was founded by Adam Draper, with financing help from his father, venture capitalist , one of the largest bitcoin holders after winning an auction of 30,000 bitcoins, at the time called ‘mystery buyer’. The company’s goal is to fund 100 bitcoin businesses within 2–3 years with $10,000 to $20,000 for a 6% stake. According to a 2015 study by Paolo Tasca, bitcoin startups raised almost $1 billion in three years (Q1 2012 – Q1 2015).


Bitcoin is useful for crowdfunding. For example, one college football sign netted over $20,000 in donations for a bitcoin enthusiast. He was shown by local TV company with a broadsheet “Hi mom, send bitcoins”.

Political economy

The decentralization of money offered by virtual currencies like bitcoin has its theoretical roots in the , especially with in his book Denationalisation of Money: The Argument Refined, in which he advocates a complete in the production, distribution and management of money to end the monopoly of .

Bitcoin appeals to tech-savvy , because it so far exists outside the institutional banking system and the control of governments. However, researchers looking to uncover the reasons for interest in bitcoin did not find evidence in Google search data that this was linked to libertarianism.

Bitcoin’s appeal reaches from critics, “who perceive the state and banking sector as representing the same elite interests, […] recognising in it the potential for collective governance of currency” and socialists proposing their “own states, complete with currencies”, to critics suspicious of , at a time when activities within the regulated banking system were responsible for the severity of the , “because governments are not fully living up to the responsibility that comes with state-sponsored money”. Bitcoin has been described as “remov[ing] the imbalance between the big boys of finance and the disenfranchised little man, potentially allowing early adopters to negotiate favourable rates on exchanges and transfers – something that only the very biggest firms have traditionally enjoyed”. Two WSJ journalists describe bitcoin in their book as “about freeing people from the tyranny of centralised trust”.



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