Bitcoin Analysis

To date there has been minimal research into the economics of Bitcoin. There are many views debating whether Bitcoin and other cryptocurrencies are a currency, a commodity and even “synthetic commodity money”. Karlstrøm (2014) believes that Bitcoin and cryptocurrencies alike share the following common characteristics: “(1) the money supply is controlled by an algorithm, the workings of which are in the public domain, and which is independent of central bank monetary policy; (2) verification of transactions is decentralised and non-hierarchical; and (3) electronic wallets (in which the currency is stored) are not directly connected to their respective owners by identity information.”

As with many financial assets, returns on Bitcoin are effected
“Any currency needs to fulfil a number of functions such as unit of account, means of payments and store of value.” (Cheah and Fry 2015; Dwyer 2015). If Bitcoin is to act as a good medium of exchange, one might expect that it would have to be generally accepted for the purpose of the transfer of ownership of a good, or a service to be provided. The ease of this, or lack thereof, poses the main problem for Bitcoin. Although Bitcoin is gradually gaining a following in relation to it being accepted in return for goods or services, in comparison to the acceptance of a fiat currency in the general economy, the acceptance of Bitcoin is minute. Also, the difficulty in acquiring Bitcoin and the cost associated with this lessens its foundation as a medium exchange. Those who wish to accept Bitcoin as a medium of exchange, also, expose themselves to high volatility in their final cash flows when converting Bitcoin into the regular fiat currency that they otherwise use. The ease of returning an item or cancelling a transaction if Bitcoin was used thwarts the argument for ease of exchange, as a transaction using the Bitcoin media cannot be cancelled. The design of Bitcoin and its inability to be double spent hampers this, common,
2015; Chu, Nadarajah and Chan 2015; Shiller 2015; Dwyer 2014; Kristoufek 2014, 2013; Weber 2014). According to the research conducted by Cheah and Fry (2015), “Bitcoin seems to behave more like an asset than a currency. Bitcoin’s main attraction seems to lie in being an object of speculation instead of functioning as money.” Ametrano (2014) states that, in relation to the inelasticity of Bitcoin, “Bitcoin planned issuance: inelastic fixed supply, similar to gold scarcity paradigm.” He also states the similarities between Bitcoin and gold, in conjunction with Hayek’s (1977) statement in relation to gold, “It would turn out to be a very good investment, for the reason that because of the increased demand for gold the value would go up; but that very fact would make it very unsuitable as money. You do not want to incur debts in terms of a unit which constantly goes up in value as it would in this case, so people would begin to look for another kind of money: if they were free to choose the money, in terms of which they kept their books, made their calculations, incurred debts or lent money, they would prefer a standard which remains stable in purchasing power.” Smith (2016), however, analyses Bitcoin-implied