Bitcoinomics 101: Principles of Bitcoin's Supply, Demand & Price

Abstract

Drawing on some some early literature in economics we develop a framework that assists the consideration of Bitcoin as a novel economic good. We highlight an essential tension between scarcity and concentration as having an overarching impact on Bitcoin's value. In conjunction with the structural features of its blockchain and consensus protocol, as instantiated by the mechanism of its code, the role of provisioning for future demand and production places a keener emphasis on the role of inventory management. This creates an interesting dynamic in Bitcoin between its structurally regulated supply and organic reservation demand for bitcoins by miners on the one hand and its broader market demand on the other. Understanding the features of this dynamic as a foundation for Bitcoin gives us some simple insights on its price path.

Keywords: Bitcoin, Cobweb Supply, Inventory, Miners, Reservation Demand, Blockchain, Price

JEL Classification: D2, D4