Can We Stabilize the Price of a Cryptocurrency?: Understanding the Design of Bitcoin and Its Potential to Compete with Central Bank Money

Abstract

Although Bitcoin was designed as a payment vehicle and as a store of value, it seems unlikely that currencies provided by central banks are at risk of being replaced, primarily because of the market price instability of Bitcoin. We diagnose the instability as being a symptom of the lack of flexibility in the Bitcoin supply schedule - a predetermined algorithm in which the proof of work is the major driving force. This paper explores the problem of instability from the viewpoint of economics, and suggests a new monetary policy for stabilizing the values of Bitcoin and other cryptocurrencies.