New NBER Working Paper on Bitcoin Economics

From Some Simple Bitcoin Economics, by Linda Schilling and Harald Uhlig 

Abstract:

How do Bitcoin prices evolve? What are the consequences for monetary policy? We answer these questions in a novel, yet simple endowment economy.  There are two types of money, both useful for transactions:  Bitcoins and Dollars.  A central bank keeps the real value of Dollars constant, while Bitcoin production is decentralized via proof-of-work.  We obtain a "fundamental condition," which is a version of the exchange-rate indeterminacy result in Kareken-Wallace (1981), and a "speculative" condition. Under some conditions, we show that Bitcoin prices form convergent supermartingales or submartingales and derive implications for monetary policy.
Available at the National Bureau for Economic Research (NBER): Working Paper #24483