Bitcoin has a central bank called the “Bitcoin network,” which we will refer to as the Bitcoin Central Bank (BCB). This central bank issues a currency called “bitcoins” and processes the transfer of bitcoins between accounts. The BCB’s rule-based monetary policy was set at its creation and its independence is secured by the distributed nature of the underlying network. […]

 First, it is rational for economic agents to hold as many bitcoins as they can afford to lose (i.e. without materially impairing their ability to consume or invest). The BCB can offer lower transaction costs than any competitor by orders of magnitude because of the PoWS subsidy. This deep competitive advantage gives economic agents the expectation that it will be adopted as a method of payment and that its exchange rate liquidity will increase. This expectation has repeatedly proven to be true so the desire to hold bitcoins has increased, as indicated by the exchange rate and Internet search volume. […]

 

 Bitcoins will continue to be hoarded and bitcoin-denominated credit markets will continue to be under-developed until either the expectations of bitcoin-holders adjust downward or are met. The BCB does not need to take action to break the current equilibrium state since the hoarders’ expectations will be met given Bitcoin’s proven superiority to legacy payment networks and stores of value. […]

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