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The routes to chaos in the bitcoins market
Journal article   Peer reviewed

The routes to chaos in the bitcoins market

Hammad Siddiqi
Review of Business and Economics Studies, Vol.3(3), pp.32-38
2015
url
https://EconPapers.repec.org/RePEc:scn:031730:16485150View
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Abstract

Banking, Finance and Investment bitcoins chaos speculation digital currency complex system mean-variance optimization medium of exchange store of value logistic map delay logisitic-henon map
I argue that the bitcoins market is an example of a complex system without a stable equilibrium. The users of bitcoins fall into two broad categories: 1) Capital gain seekers: who have no functional use for the currency apart from an expectation of capital gains; 2) Functional users: who use the currency to save on transaction costs as it provides a less costly medium of exchange over traditional fiat currencies. I assume thateach category consists of mean-variance optimizers, and specify simple evolutionary dynamics for each category. I identify two simple routes to chaos in the bitcoins market. If only capital gain seekers are present, then one route to chaos is via the logistic map. If both categories of users matter then a possible route to chaos is via the delay logistic-Hénon map. A policy recommendation follows: in order to pre-empt chaos in the bitcoins market, currency exchanges should be allowed to convert bitcoins into dollars and vice versa if and only if there is an associated transaction involving buying and selling of goods or services or if the bitcoins are freshly mined.Such a regulation pre-empts chaos by reducing the impact of capital gain seekers on the virtual currency's value.

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