Striving Toward Bitcoin Price Stability: Second-layer Money and the Case for Real Bills, Scrip & Notes

Abstract

Abstract Monetary systems comprise various layers of real and financial assets arranged hierarchically. Due to its properties, Bitcoin is a suitable asset to become the base money of a monetary system once its price has stabilized and people see it more like a medium of exchange than an investment. We review Bitcoin’s characteristics and explain their effect on its intra-and inter-temporal liquidity. We argue that Bitcoin will lower its bid-ask spread once users adopt financial assets convertible to Bitcoin. We propose the use of three financial assets working as Bitcoin derivatives to reduce Bitcoin’s demand shocks and lower its volatility: real bills, private scrip and cash notes. We explain when will this process take place and why people would have an incentive to rely on credit even under a Bitcoin standard.