Are Bitcoins Money?

Abstract

This paper is a primer on many topics related to the digital cryptocurrency, Bitcoin. Bitcoins have been developed and advertised as a private digital money. We analyze this claim, generally to conclude that Bitcoins as they presently exist are not money. They are not generally accepted in exchange and do not serve as a unit of account. We test the hypothesis that the value of Bitcoins are determined largely by network externalities, finding very limited data to support this claim. We analyze features of bitcoins, such as their high exchange rate volatility with respect to the U.S. dollar and other currencies. We examine pricing on various exchanges, and how the law of one price works in bilateral and trilateral exchange rates involving Bitcoins. The potential for arbitrage is examined. We look at the use of bitcoins at Overstock.com, and the impact of that decision on Overstock.com stock prices and on the value of Bitcoins. We consider Bitcoins as an asset and examine their contribution to portfolio holdings. We discuss Bitcoin’s use in fraud resembling a Ponzi scheme. Finally, we speculate on the future of Bitcoins and the potential uses for the underlying technology.