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The Economics of Cryptocurrencies
– Bitcoin and Beyond∗
Bank of Canada
Thorsten V. Koeppl‡
First version: March, 2017
This version: September, 2018
How well can a cryptocurrency serve as a means of payment? We study the optimal design of
cryptocurrencies and assess quantitatively how well such currencies can support bilateral trade.
The challenge for cryptocurrencies is to overcome double-spending by relying on competition
to update the blockchain (costly mining) and by delaying settlement. We estimate that the
current Bitcoin scheme generates a large welfare loss of 1.4% of consumption. This welfare loss
can be lowered substantially to 0.08% by adopting an optimal design that reduces mining and
relies exclusively on money growth rather than transaction fees to finance mining rewards. We
also point out that cryptocurrencies can potentially challenge retail payment systems provided
scaling limitations can be addressed.
Keywords: Cryptocurrency, Blockchain, Bitcoin, Double Spending, Payment Systems
JEL Classification: E4, E5, L5
∗The views expressed in this paper are not necessarily the views of the Bank of Canada. We thank the audiences
at many seminars and conferences for their comments. This research was supported by SSHRC Insight Grant 435-
2014-1416. The authors declare that they have no relevant or material financial interests that relate to the research
described in this paper.
†Bank of Canada, 234 Wellington St, Ottawa, ON K1A 0H9, Canada (e-mail: firstname.lastname@example.org).
‡Queen’s University, Department of Economics, Kingston, K7L 3N6, Canada (e-mail: email@example.com).
How well can a cryptocurrency serve as a means of payment? Since the creation of Bitcoin in 2009,
many critics have denounced cryptocurrencies as fraud or outright bubbles. More nuanced opinions
have argued that such currencies are only there to support payments for illegal activities or simply
waste resources. Advocates point out, however, that – based on cryptographic principle