A Search-Theoretic Approach

This paper considers whether or not the Bitcoin stably stay in the market as a method of payment using a dual-currency money-search model. In the model, there are traditional money and Bitcoin. The two currencies are classi…ed by the storage cost and the probability that sellers accept particular money for payments. Agents are randomly matched for transactions. To consider substitution e¤ect between monies, we allow new entries every period. In the beginning of each period, new entrants come into the matching process with a unit of money of their choice. A certain number of sellers also come into the same process to maintain the population share of sellers at a constant level. With appropriately chosen parameters, we …nd that there can be stable and instable equilibria of the share of bitcoiners. In this case, a stable equilibrium is a success (bitcoiners take a large share) while the other is a failure (bitcoiners take a marginal share or vanish). However, if the in‡ation rate of traditional money gets smaller, the successful equilibrium disappears to start approaching the failure even if it is currently widely accepted. Furthermore, welfare comparisons suggest an increase in the share of bitcoiners has a negative e¤ect; hence, the bene…t from reductions in the transaction costs must compensate for the welfare erosion if Bitcoin is accepted as a new kind of payment system. If we are heading to the success, the Bitcoin community or the public authorities need to prepare for protecting the system from several illicit activities. JEL Classi…cations: C78; E41; E42