The Economics of Bitcoin

What currency made teenagers into millionaires, forced adults into bankruptcy, and had the entire world talking?  Bit-coin

Image result for bitcoin
Bit-coin is a cryptocurrency operating based off of an open source mathematical system.  Anyone can change this system client side, but universal updates are released optionally to every bit coin user.  In other words, it is a decentralized system that completely bypasses banks.  Block chain currencies solve the issue of spending one unit of currency twice by having a system like a bank that tracks the currency, but this "bank" is an open network that no one has unequal control over.

The economics of bit-coin are actually pretty close to that of a perfectly competitive market.  All of the products are the same (bit-coins), it is super easy to buy a bit-coin and it is super easy to sell your bit-coins meaning the entry and exit costs are minimal, every consumer is also a seller and there are a bunch of consumers, etc.  But there is one factor that doesn't resemble a perfectly competitive market; access to data.

Not everyone dealing in bit coin has access to the same data and this means that some competitors will have an edge over others.  These competitors will know when to buy and when to sell, thus these are the winners and your odds of being the loser go up if you don't have access to this info.

Bit coin is nearly a perfectly competitive market, but it will eventually trend towards being as close as naturally possible.  The price of producing a bit coin will become constant and their will only be a specific amount of bit coin in circulation.  When this happens our only factor will be quantity traded.  This will be nearly perfect.





https://www.investopedia.com/terms/p/perfectcompetition.asp
https://medium.com/@hassmccook/the-economic-environmental-cost-of-bitcoin-part-iv-perfect-competition-bitcoin-9f31156034ae
https://www.coindesk.com/information/what-is-bitcoin

Comments

  1. AnonymousMarch 15, 2019 at 10:38 AM

    Great post! However, I'm confused about your point about access to data. The definition of a decentralized currency is the fact that everyone has access to the same data. What data do some people have that others don't? You didn't specify what data it was or how it gives an advantage, which is why I'm confused.

    I am finding the cryptocurrency industry very comparable to the video game industry, which is very interesting. In the documentary we watched, we learned about pure competition and how Minecraft became a successful game. This is very similar with regards to competition between different cryptocurrencies, with Bitcoin on top.

    ReplyDelete
  2. AnonymousMarch 16, 2019 at 9:19 PM

    This post is really interesting because while inside trading is illegal for stocks, it's not as clear for bitcoin, so if you have the power and money to change the price of bitcoin, you can take advantage of this to make a lot of money at the expense of the average uninformed bitcoin user. I think that there should be more regulations on bitcoin and inside trading in general to make sure that this doesn't happen, as even though it's a capitalist economy, the wealth gap will only continue to widen if people take advantage of less informed and wealthy people for personal gain, and this will lead to a lower standard of living overall and an unstable economy.

    ReplyDelete
  3. AnonymousMarch 17, 2019 at 1:50 PM

    Really interesting post! I agree with your point that the bit-coin market resembles a perfectly competitive market, but the idea that interested me the most is that there will "only be a specific amount of bit coin in circulation." After reading that I wanted to know, how will that affect supply and demand? Well, according to one source, this makes the supply perfectly inelastic, which then causes "greater response to demand shifts." This helps to explain why the bitcoin market and prices can be volatile: if demand increases even a little bit, the equilibrium price will jump much higher. Overall, this is an interesting idea to consider and gives a little more background on the market of bitcoins.
    Source: https://www.cmegroup.com/education/featured-reports/an-in-depth-look-at-the-economics-of-bitcoin.html

    ReplyDelete

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