An Asset Market Approach to the Conditions on the Usage of Cryptocurrencies with Fiat Currencies in a Coexistence Economy: The Land under Zero.

Date

2022-10-01

Author

Erdil, Erkan
Sıkı, Koray

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This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

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This study aims to construct a theoretical framework for the usage of cryptocurrencies together with fiat currencies in a coexistence economy to estimate the future effects of cryptocurrencies on the world economy. In this model, Bitcoin is used as a representative cryptocurrency, the uncertainties behind it are taken into consideration measuring by the variance of the expected returns on it. The model has three agents such as buyers, miners, and sellers. Buyers have to decide how much fraction of their initial wealth they spend either on Bitcoin or fiat money in the intention both to consume goods and services and to invest in the asset market. Buyers’ problem of choice is solved by considering their risk attitudes. Miners select the optimal mining effort to validate the transactions to have maximum gain. They gain rewards as Bitcoin and transaction fees, but they incur the cost of electricity as long as they exert effort to mine Bitcoin. Sellers sell their goods and services in the goods market to buyers and have no important effect on the usage of Bitcoin in this model. The study reveals the coexistence conditions of cryptocurrencies and fiat money based on the agents’ (buyers, miners, and sellers) optimization decisions. Overall, the “return-motive” creates the main intuition of using Bitcoin as a medium of exchange in the goods market. The uncertainties behind cryptocurrencies, the transaction and electricity fees, and people’s risk attitudes construct the main determinants of the condition of using cryptocurrencies together with the fiat currencies.

Subject Keywords

Cryptocurrencies, Asset Market, Fiat Money, Uncertainty and Information

URI

https://www.ekonomikyaklasim.org/?mno=107523
https://hdl.handle.net/11511/107067

Collections

Department of Economics, Article